**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

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** **

**Form 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF1934

**Forthe fiscal year ended December 31, 2006**

**o**                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

**Forthe transition periodfrom             to             **

**Commissionfile number 001-14775**

**DYNAMIC MATERIALS CORPORATION**

(Exact name ofRegistrant as specified in its charter)

| **Delaware**                              |   | **84-0608431**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

**5405 Spine Road, Boulder, Colorado 80301**

(Address ofprincipal executive offices, including zip code)

**(303)665-5700**

(Registrant’stelephone number, including area code)

Securities registered pursuant to Section 12(b) of theAct:  **None**

Securities registered pursuant to Section 12(g) of theAct:  **CommonStock, $.05 Par Value**

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes  o  No  x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.   Yes  oNo  x

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes  x  No  o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.    Large acceleratedfiler  o  Acceleratedfiler  x  Non-acceleratedfiler  o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct).

Yes  o  No  x

The approximateaggregate market value of the voting stock held by non-affiliates of theregistrant was $391,957,677 as of June 30, 2006.

The number ofshares of Common Stock outstanding was 12,085,749 as of February 28, 2007.

Certaininformation required by Items 10, 11, 12, 13 and 14 of Form 10-K isincorporated by reference into Part III hereof from the registrant’s proxystatement for its 2007 Annual Meeting of Shareholders, which is expected to befiled with the Securities and Exchange Commission (“SEC”) within 120 days ofthe close of the registrant’s fiscal year ended December 31, 2006.

 

 

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**PART I**

**ITEM 1.  Business**

**Overview**

Dynamic MaterialsCorporation is a leading provider of explosion-welded clad metal plates.  Explosion-weld cladding uses an explosivecharge to bond together plates of different metals that do not bond easily withtraditional welding techniques.  Theprocess of welding the metal plates through an explosion is also known as “shooting.”  We refer to this part of our business as “DMCClad” or the “Explosive Metalworking” segment. Detacladâ is the main trade name under which DMC Cladmarkets its explosion-welded clad products. DMC Clad’s products are used in critical applications in a variety ofindustries, including upstream oil and gas, oil refinery, chemical andpetrochemical, hydrometallurgy, aluminum production, shipbuilding, powergeneration and industrial refrigeration. DMC Clad’s market leadership for explosion-welded clad metal plates is aresult of its state-of-the-art manufacturing facilities, technologicalleadership and production expertise.  Webelieve our customers select us for our high quality product, speed andreliability of delivery, and cost effectiveness.  We have a global sales force that allows usto access international markets.  OurExplosive Metalworking operations are located in Pennsylvania, France andSweden.

Through our AMK Weldingsegment (“AMK Welding”), we also provide advanced welding services, primarilyto the power turbine and aircraft engine manufacturing industries.  AMK Welding is a highly specialized weldingsubcontracting shop for complex shapes used principally in gas turbines andaircraft engines.  AMK Welding’soperations are conducted at its South Windsor, Connecticut facility.

**CladMetals Industry**

Clad metal plates are usedin the construction of heavy, corrosion resistant pressure vessels and heatexchangers for upstream oil and gas, oil refinery, chemical and petrochemical,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration and similar industries. Clad metal plates consist of athin layer of an expensive, corrosion resistant metal such as titanium orstainless steel, which is metallurgically combined with a less expensive, lesscorrosion resistant, thicker base metal, typically carbon steel. There are fourcommon ways to use such corrosion-resistant metals in corrosion resistantvessels:

·      Solidmetal construction

·      Rollbondclad metals

·      Weldoverlay clad metals

·      Explosion-weldedclad metals

The various claddingtechnologies were developed to produce materials with properties similar tothose of a solid metal, but at a lower cost. The most appropriate and cost-effective alternative for an end-userdepends on both the type of application and the clad metal thicknessrequired.  While explosion-welded, rollbondand weld overlay are competing cladding technologies, there are limitations onthe product that each can produce. Explosion-welded clad technology is the only one of these processessuitable for joining titanium, zirconium or tantalum metals to a base metal.

The use of a solid metal isfrequently the lowest cost alternative for metal thicknesses of less than 0.75inch.  However, it is generally the mostexpensive alternative for greater thicknesses.

The rollbond technology isperformed by several of the world’s heavy plate mills.  In this process, the clad metal and basemetal are bonded together during a hot rolling process in which a slab of metalis converted to plate.  Rollbond cladmetals are cost-effective in metal thicknesses up to two inches, depending onthe metal alloy type.  Rollbond productshave lower bond shear strength and corrosion resistance, which limits their usein certain applications, and rollbonding may only be used for a specific group ofmetal combinations due to metallurgical compatibility issues.

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In weld overlay cladding,which is typically performed by equipment fabricators, the cladding layer isdeposited on the base metal using arc-welding type processes.  Weld overlay is a cost-effective technologyfor complicated shapes, field service jobs and for production of heavy wallpressure vessel reactors.  Due todistortion and dilution concerns, overlay is rarely used for new constructionof equipment that is less than two inches thick.  Weld overlay clad metals have corrosionresistance that can be compromised by dilution, which limits their use incertain applications.  As with rollbond,weld overlay may only be used for a specific group of metal combinations due tometallurgical compatibility issues.

Explosion-welded cladproducts retain the properties of the original metals before they were bonded,such as corrosion resistance and mechanical properties, unlike materialsproduced by rollbond or weld overlay. There is no dilution of the original metals and the alloy chemistry isconstant over the full thickness of the product.  When fabricated properly, the two metals willnot come apart, even under the most extreme circumstances. The explosion-weldedclad process is suitable for joining most metals used to construct vessels andequipment used in corrosive applications, whereas rollbond and weld overlay arelimited to certain compatible metal combinations.  Explosion-welded clad metal is used to createflat plates, concentric cylinders, formed heads and transition joints.  Explosion-weld cladding is suitable forcreating a product that has a cladding thickness of 0.04 inch to two inches anda base thickness of 0.25 inch to forty inches. Depending on alloy type, explosion-welded clad metals are often the mostcost effective solution for metal thicknesses of between one and five inches.  While rollbond most frequently bondsstainless steel or nickel alloy to a steel plate, welding zirconium, titaniumor tantalum to a steel plate or to an alloy plate can only be done byexplosion-weld cladding.

**CladMetals End Use Markets**

Explosion-welded clad metalis primarily used in construction of large industrial equipment involving highpressures and temperatures, and which needs to be corrosion-resistant.  The eight broad industrial sectors discussedbelow comprise the bulk of demand for DMC Clad’s business.  The demand for clad metal is driven by theunderlying demand for new equipment and facility maintenance in these primarymarket sectors.  Overall, the market forexplosion-welded clad metal has continuously grown since its inception, withdemand dependent upon the underlying needs of the various market sectors.  During the past two years, there has beensignificant capital investment in many of these markets.  This current increase in demand is mainlyattributable to strong markets for energy, metals, and petrochemicals.

*UpstreamOil and Gas*:  The upstream oil and gas industry covers abroad scope of operations related to recovering oil and/or gas for subsequentprocessing in refineries.  Clad metal isused in separators, glycol contactors, piping, heat exchangers and otherrelated equipment.  The increase in oiland gas production from deep, hot, and corrosive fields has significantlyincreased the demand for clad equipment. At current energy price levels, many non-traditional energy productionmethods are potentially commercially viable. These include liquid fuel production processes such as coalgasification, oil recovery from tar sands, and ethanol production fromagricultural products. Also methods for transport or transformation of naturalgas become viable, such as natural gas liquification and conversion of gas toliquid petroleum products.  Virtually allof these processes involve conditions which require clad metal in some of theequipment.  The primary clad metals forthis market are stainless steel and nickel alloys clad to steel, with some useof reactive metals.

*OilRefinery*:  Petroleum refining processes are frequentlycorrosive, hot, and high pressure.  Cladmetal is extensively used in a broad range of equipment includingdesulfurization hydrotreaters, coke drums, distillation columns, separators andheat exchangers.  In the United States,refineries are running near full capacity and, adding capacity and reducingcostly down-time are a high priority. The increasing reliance upon low quality, high sulfur crude furtherdrives demand for new corrosion resistant equipment.  Worldwide trends in regulatory control ofsulfur emissions in gas, diesel and jet fuel are also increasing the need forclad equipment.  Like the upstream oiland gas sector, the metals of construction are primarily stainless steel andnickel alloys.

*Chemicaland Petrochemical*:  Many common products, ranging from plasticsto drugs to electronic materials, are produced by chemical processes.  Because the production of these items iscorrosive and conducted under high pressure or temperature, corrosion-resistantequipment is needed, which may be produced most cost-effectively using cladconstruction.  One of the largerapplications for titanium-clad equipment is in the manufacture of Purified TerephthalicAcid (“PTA”), a precursor product for polyester, which is used in everythingfrom carpets to plastic bottles.  Thismarket

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requiresextensive use of stainless steel and nickel alloy, but also uses titanium and,to a lesser extent, zirconium and tantalum.

*Hydrometallurgy*:  Theconversion of raw ore to metal generally involves high energy and/or corrosiveprocesses.  Traditionally, most metalshave been produced by high temperature smelting.  Over the past two decades there has been anincreasing trend toward acid leaching processes.  These hydrometallurgy processes are moreenvironmentally friendly and more energy efficient. The processes forproduction of nickel, gold, and copper involve acids, high pressures, and hightemperatures.  Titanium is the materialof choice.  Titanium-clad plate is usedextensively for construction of autoclaves and peripheral equipment.  Increasing demand for metals in the currentworld market provides the impetus for a significant number of new mining andhydrometallurgy projects.

*AluminumProduction*:  Aluminum is reduced from its oxide in largeelectro-smelter facilities called potlines. The electric current power is carried via aluminum conductors.  The electricity must be transmitted intosteel components for the high temperature smelting operations.  Aluminum cannot be welded to steelconventionally.  Explosion-weldedaluminum-steel transition joints provide an energy efficient and highly durablesolution for making these connections. Modern potlines may use a large number of transition joints.  The parts are typically replaced when thepotlines are refurbished, commonly every few years.  Although aluminum production is the majorelectrochemical application for DMC Clad products, there are a number of otherelectrochemical applications including production of  magnesium, chlorine and chlorate.

*Shipbuilding*:  Thecombined problems of corrosion and top-side weight drive significant demand forour aluminum-steel transition joints. Top-side weight is often a significant problem with tall ships, includingcruise ships, naval combatants, ferries and yachts.  Use of aluminum in the upper structure andsteel in the lower structure provides stability.  Bolted joints between aluminum and steelcorrode quickly.  Aluminum cannot bewelded directly to steel using traditional welding processes. Welded joints canonly be made using transition joints. DMC Clad products can be found on many well known ships, including theQE II and modern U.S. Navy aircraft carriers.

*PowerGeneration*:  Fossil fuel power generation plants requireextensive use of heat exchangers, many of which require corrosion resistantalloys to handle low quality cooling water. Our clad plates are used extensively for heat exchanger tubesheets.  The largest clad tubesheets in conventionalsteam plants are used in the final low pressure condensers.  For most coastal and brackish water cooledplants, titanium is the metal of choice technically and titanium-cladtubesheets are the low cost solution.

*IndustrialRefrigeration*:  Heat exchangers are a core component ofrefrigeration systems.  When the coolingwater is seawater, brackish, or even slightly polluted, corrosion resistantmetals are necessary.  Metal selectioncan range from stainless steel to copper alloy to titanium, andexplosion-welded clad metal is often the low cost solution for making thenecessary components.  Applications rangefrom refrigeration chillers on fishing boats to massive air conditioning unitsfor skyscrapers, airports, and deep underground mines.

**AMKWelding End Use Markets**

Parts for power turbines andaircraft engines must be machined to exacting tolerances and welded accordingto exacting specifications.  Many ofthose parts have complex shapes, the welding of which requires significantexpertise.  AMK Welding is a specializedoperation that welds complex, shaped parts for machining companies that, inturn, supply the manufacturers of power turbines and aircraft engines.  Some machining companies also have their ownwelding facilities, which compete with AMK Welding for business.

**Business Segments**

We operate two businesssegments: Explosive Metalworking (which we also refer to as DMC Clad) and AMKWelding.  The Explosive Metalworkingsegment uses proprietary explosive processes to fuse dissimilar metals and alloysand has 40 years of experience.  We arethe largest explosion-welded clad metal manufacturer in North America, and ourtwo plants in Europe provide us with a leadership position in the Europeanmarket.  AMK Welding utilizes variousspecialized technologies to weld components for use in commercial and militaryjet engines as well as power-generation turbines and has 40 years ofexperience.

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**Explosive Metalworking**

The Explosive Metalworking segment seeks to build onits leadership position in itsmarkets.  The ExplosiveMetalworking segment currently represents approximately 95% of ourrevenue.  The three manufacturing plantsand their respective shooting sites in Pennsylvania, France and Sweden providethe production capacity to address concurrent projects for DMC Clad’s currentdomestic and international customer base.

The primary product of theExplosive Metalworking segment is explosion-welded clad metal plate. Clad metalplates are used in the construction of heavy, corrosion resistant pressurevessels and heat exchangers for upstream oil and gas, oil refinery, chemicaland petrochemical, hydrometallurgy, aluminum production, shipbuilding, powergeneration, industrial refrigeration and similar industries.  The characteristics of DMC Clad’s explosivemetalworking processes may enable the development of new products in a varietyof industries and DMC Clad continues to explore such development opportunities.

The principal product ofmetal cladding, regardless of the process used, is a metal plate composed oftwo or more dissimilar metals, usually a corrosion resistant metal and steel,bonded together. Prior to the explosion-welded clad process, the materials areinspected, the mating surfaces are ground, and the metal plates are assembledfor cladding. The process involves placing a sheet of the cladder over aparallel plate of backer material and then covering the cladder material with alayer of specifically formulated explosive. A small gap or “standoff space” ismaintained between the alloy cladder and the backer substrate. The explosion isthen initiated on one side of the cladder and travels across the surface of thecladder forcing it down onto the backer. The explosion happens in approximatelyone-thousandth of a second.  The collisionconditions cause a thin layer of the mating surfaces to be spalled away in ajet.  This action removes oxides andsurface contaminants immediately ahead of the collision point.  The extreme pressures force the two metalcomponents together, creating a metallurgical bond between them.  Theexplosion-welded clad process produces a strong, ductile, continuousmetallurgical weld over the clad surface. After the explosion is completed, the resulting clad plates areflattened and cut, and then undergo testing and inspection to assureconformance with internationally accepted product specifications.

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**EXPLOSION-WELDINGPROCESS**

Explosion-welded claddingtechnology is a method to weld metals that cannot be welded by conventionalprocesses, such as titanium-steel, aluminum-steel, and aluminum-copper. It canalso be used to weld compatible metals, such as stainless steels and nickelalloys to steel.  The cladding metals are typically titanium, stainless steel, aluminum, copper alloys, nickel alloys,tantalum, and zirconium. The base metals are typically carbon steel, alloysteel, stainless steel and aluminum. Although the patents for the explosion-welded cladding process haveexpired, DMC Clad has proprietary knowledge that distinguishes it from itscompetitors.  The entireexplosion-welding process involves significant precision in all stages, and anyerrors can be extremely costly as they result in the discarding of theexpensive raw material metals.  DMC Clad’stechnological expertise is a significant advantage in preventing costly waste.

Explosion-welded clad metalis used in critical applications in a variety of industries, including upstreamoil and gas, oil refinery, chemical and petrochemical, aluminum production,shipbuilding, power generation, industrial refrigeration and other industrieswhere corrosion, temperature and pressure combine to produce demandingenvironments.  Explosion-welded cladmetal is also used to produce bimetal transition joints or other components which are used in shipconstruction, and in a variety of electrochemical industries including aluminumproduction.

DMC Clad’s metal productsare primarily produced on a project-by-project basis conforming to requirementsset forth in customers’ purchase orders. Upon receipt of an order, DMC Cladobtains the component materials from a variety of sources based on quality,availability and cost and then produces the order in one of its threemanufacturing plants.  Final products areprocessed to meet contract specific requirements for product configuration andquality/inspection level.

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**AMKWelding**

AMK Welding employs avariety of sophisticated processes and equipment to provide specialized weldingservices principally to a power turbine manufacturer and commercial andmilitary aircraft engine manufacturers. AMK Welding is located in South Windsor, Connecticut.

Welding services areprovided on a project-by-project basis based on specifications set forth incustomers’ purchase orders. Upon receipt of an order for welded assemblies, AMKWelding performs welding services using customer specific welding procedures.

AMK Welding uses a varietyof processes and specialized equipment, including electron beam and gastungsten arc welding processes.  AMKWelding has considerable expertise in vacuum chamber welding, which is acritical capability when welding titanium, high temperature nickel alloys and other specialty alloys.  These welding techniques are used for thewelding of blades and vanes and other turbine parts typically located in thehot gas path of aircraft engines.  Inaddition to its welding capabilities, AMK Welding also uses various heattreatment and non-destructive examination processes, such as radiographicinspection, in support of its welding operations.

**Suppliers,Competition, Customer Profile, Marketing and Research and Development**

**DMC Clad**

*Suppliers and Raw Materials*

DMCClad uses a range of alloys, steels and other materials for its operations,such as stainless steel, copper alloys, nickel alloys, titanium, zirconium,tantalum, aluminum and other metals.  DMCClad sources its raw materials from a number of different producers andsuppliers. DMC Clad holds a limited metal inventory and purchases its rawmaterials based on contract specifications. Under most contracts, any rawmaterial price increases are passed on to DMC Clad’s customers.  DMC Clad closely monitors the quality of its suppliesand inspects the type, dimensions, markings, and certification of all incomingmetals to ensure that the materials will satisfy applicable construction codes.DMC Clad also manufactures amajority of its own explosives from standard raw materials, thusachieving higher quality and lower cost.

*Competition*

*Metal Cladding. *DMC Clad faces competition from alternative technologies such asrollbond and weld overlay. Usually the three processes do not compete directlyagainst each other, each having its own preferential domain of applicationrelating to metal used and thicknesses required.  However, due to specific projectconsiderations such as technical specifications, price and delivery time,explosion-welding may have the opportunity to compete successfully againstthese technologies.  Rollbond is onlyproduced by a few steel mills in the world. The weld overlay process, which is produced among the many vesselfabricators who are often also DMC Clad customers, is a slow and laborintensive process that requires a large amount of floor space for theequipment.

*Explosion-WeldedMetal Cladding.* Competition in the explosion-welded clad metalbusiness is fragmented.  DMC Clad holds astrong market position in the clad metal industry. DMC Clad is the leadingproducer of explosion-welded clad products in North America, and it has astrong position in Europe against smaller competitors. The main competitor inAsia is a division of Asahi Kasei, which has competitive technology and arecognized local brand name.  There areseveral explosion-welded clad producers in China, most of whom are technicallylimited and are currently not exporters outside of their domestic market. Toremain competitive, DMC Clad intends to continue developing and providingtechnologically advanced manufacturing services, maintain quality levels, offerflexible delivery schedules, deliver finished products on a reliable basis andcompete favorably on the basis of price.

*Customer Profile*

DMC Clad’s products are usedin critical applications in a variety of industries, including upstream oil andgas, oil refinery, chemical and petrochemical, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration and othersimilar industries.  DMC Clad’s customersin these industries require metal products that can withstand exposure tocorrosive materials, high temperatures and high pressures.  DMC Clad’s customers can be divided

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intothree tiers: the product end-users (e.g., operators of chemical processingplants), the engineering contractors who design and construct plants forend-users, and the metal fabricators who manufacture the products or equipmentthat utilize DMC Clad’s metal products. It is typically the fabricator that places the purchase order with DMCClad and pays the corresponding invoice. DMC Clad has developed strong relationships over the years with theengineering contractors (relatively large companies) who sometimes act asprescriptor to fabricators.

*Marketing, sales, distribution*

DMC Clad conducts itsselling efforts by marketing its services to potential customers through seniormanagement, direct sales personnel, program managers and independent salesrepresentatives. Prospective customers in specific industries are identifiedthrough networking in the industry, cooperative relationships with suppliers,public relations, customer references, inquiries from technical articles andseminars and trade shows. DMC Clad markets its clad metal products to threetiers of customers: product end-users, engineering contractors and metalfabricators.  DMC Clad’s sales office inthe United States covers the Americas and Asia, its sales office in Francecovers Southern Europe, the Middle East and Africa, while its sales office inSweden covers Northern Europe and Germany. In addition, DMC Clad also operatesa sales office in India.  Members of theglobal sales team may be called to work on projects located outside theirterritory.  By maintaining relationshipswith its existing customers, developing new relationship with prospectivecustomers and educating all its customers as to the technical benefits of DMCClad’s metal-worked products, DMC Clad endeavors to have its products specifiedas early as possible in the design process.

In addition to its directsales office, DMC Clad also works with sales agents located in Canada, SouthAfrica, the United Kingdom, Germany, Italy, Norway, Finland, Saudi Arabia,Australia, Indonesia, China, Korea and Japan. DMC Clad has several exclusive or non-exclusive agreements with agentsfor sales and business promotion in specific territories defined by eachagreement. These agency contracts cover additional sales in specific European,Middle Eastern and Far Eastern countries. Agency agreements are usually one to two years in duration and, subjectto agents meeting DMC Clad’s performance expectations, are automaticallyrenewed.

DMC Clad’s sales aregenerally shipped from the manufacturing locations in the United States, Franceand Sweden, and all shipping costs are covered by the customer. Regardless ofwhere the sale is booked (in Europe or the U.S.), DMC Clad will produce it,capacity permitting, at the location closest to the delivery place. In theevent that there is a short term capacity issue, DMC Clad produces the order atany of its production sites, prioritizing timing.  The various production sites allow DMC Cladto meet customer production needs in a timely manner.

*Research and Development*

We prepare a formal researchand development plan annually. It is implemented at the French and at the U.S.cladding sites and is supervised by a Technical Committee, chaired by the ChiefExecutive Officer, that reviews progress quarterly and meets once a year toestablish the plan for the following 12 months. The research and development projects concern process support, newproducts and special customer-paid projects.

**AMKWelding**

At AMK Welding, thematerials welded are a function of the type of parts supplied by the customersand include many steel varieties, various nickel alloys and customer-createdproprietary alloys typically used in the aerospace or ground turbinesindustries.  Other than the metal wireused in the welding process, AMK Welding does not purchase metals, and itreceives the parts to be welded from the customer.

AMK Welding relies on a fewkey customers for the majority of its business, including GE Energy, GeneralElectric Aircraft Engines and their first tier subcontractors, such as BarnesAerospace, and divisions of United Technology, such as Hamilton Standard,Sikorsky Aircraft and Pratt and Whitney. In addition, AMK Welding has entered into a 5-year contract to providewelding services to the GE Energy Business of General Electric Company for upto six H System gas turbine engines per year. During the term of this contract, the customer has agreed to use AMKWelding for welding services for the first six H System gas turbine enginessuch customer manufactures each year.  Inthe aircraft engine business, AMK Welding competes against a few small weldingcompanies that are typically privately owned. AMK Welding competes successfully based on a reputation foruncompromising quality and rapid responsiveness to customer needs.

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**CorporateHistory & Recent Developments**

**CompanyHistory**

Explosive Fabricators Inc. (“EFI”)was founded in 1965 and incorporated in 1971 as a Colorado corporation.  In 1976, EFI became a licensee of Detacladâ, the explosion-weld clad process discoveredby DuPont in 1959. EFI became a public company in 1977 and was renamed DynamicMaterials Corporation in 1994.  In 1996, we purchased the Detacladoperating business from DuPont.  Wereincorporated in 1997 as a Delaware corporation.  In 1998, we acquired AMK Welding, Spin Forgeand Precision Machined Products (“PMP”).

In a series of transactionsincluding open market purchases and a direct purchase of our common stockpursuant to a stock purchase agreement, SNPE, Inc. (“SNPE”), which isindirectly wholly owned by the government of France, acquired shares of ourcommon stock, resulting by June 30, 2000 in its holding of 2,763,491 shares ofour common stock, or approximately 56% of our outstanding shares of commonstock.  On June 8, 2005, SNPE exercisedits conversion rights on a convertible subordinated note it held, and the notewas converted into 200,000 shares of our common stock at a conversion rate of$6 per share, increasing SNPE’s ownership to 2,963,491 shares at that time. Asubsequent stock split increased this amount to the current 5,926,982 sharesheld by SNPE.  On May 15, 2006, in anunderwritten public offering, SNPE sold all of its shares of the Company’scommon stock.  Following the sale, fourmembers of the Company’s board of directors, each of whom had represented SNPE,resigned from the board.  All transactionexpenses were paid by SNPE.

At the time of its acquisitionof our common stock, SNPE’s parent company, Groupe SNPE, was the indirect ownerof Nobelclad, which had been a licensee of the Detacladâ technology in France since 1966, and hadacquired its Swedish competitor, Nitro Metall, in 1997, as well as its U.K. andGerman competitors in 1998.  On July 3,2001, we completed our acquisition of substantially all of the outstandingstock of Nobelclad from Nobel Explosifs France (“NEF”). NEF is wholly owned byGroupe SNPE and is a sister company to SNPE. Nobelclad and its wholly-ownedsubsidiary, Nitro Metall AB (“Nitro Metall”), are the primary manufacturers ofexplosion-welded clad products in Europe and operate cladding businesseslocated in Rivesaltes, France and Likenas, Sweden, respectively, along withsales offices in each country. Products manufactured by Nobelclad and NitroMetall are similar to those produced by DMC Clad’s domestic factory in MountBraddock, Pennsylvania.

Historically, our Aerospacesegment was comprised of three companies that we acquired in 1998:  AMK Welding, Spin Forge and PMP.  Because PMP and Spin Forge were sold inOctober of 2003 and September of 2004, respectively, and are reported asdiscontinued operations, AMK Welding has become a stand-alone business segment.

**Employees**

As of December 31, 2006, weemployed approximately 210 permanent employees the majority of whom wereengaged in manufacturing operations, and the remainder were engaged in salesand marketing or corporate functions.

The majority of ourmanufacturing employees are not unionized.** **Of the 210 permanent employees,132 are U.S. based, 61 are based in France at the Nobelclad facility and 17 arebased in Sweden at Nitro Metall.  About45% of Nobelclad’s employees and all Nitro Metall employees are members oftrade unions.  In addition, we also usebetween 15 and 20 temporary workers at any given time, depending on theworkload.

In 2005, approximately halfof the employees of the French facility held a strike for one week, which wasthe first in 8 years.  The strike wasresolved and we believe that employee relations are good.

**Insurance**

Our operations expose us topotential liabilities for personal injury or death as a result of the failureof a component that has been designed, manufactured or serviced by us, or theirregularity or failure of metal products we have processed ordistributed.  We believe that we maintainliability insurance adequate to protect us from future product liabilityclaims.

 

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**Proprietary Knowledge, Permitsand Patents**

*Protectionof Proprietary Information*.   We hold patents related tothe business of explosive metalworking and metallic processes and also owncertain registered trademarks, including Detaclad®, Detacouple®, Dynalock®,EFTEK®, ETJ 2000® and NOBELCLAD®. Although the patents for the explosion-weldedcladding process have expired, our current product application patents expireon various dates through 2020.  Sinceindividual patents relate to specific product applications and not to coretechnology, we do not believe that such patents are material to our businessand the expiration of any single patent is not expected to have a materialadverse effect on our operations.  Muchof the manufacturing expertise lies in the knowledge of the factors that affectthe quality of the finished clad product, including the types of metals to beexplosion-welded, the setting of the explosion, the composition of theexplosive and the preparation of the plates to be bonded.  We have developed this specialized knowledgeover our 40 years of experience in the explosive metalworking business.  We are very careful in protecting ourproprietary know-how and manufacturing expertise, and we have implementedmeasures and procedures to ensure that the information remains confidential.

*Permits*. Explosive metalworking involves the use of explosives, making safety acritical factor in our operations.  Inaddition, it is a highly regulated industry for which detailed permits arerequired.  These permits require renewalevery four years.  See “Item 1A — RiskFactors — Risk Factors Related to Our Industry — We are subject to extensivegovernment regulation and failure to comply could subject us to futureliabilities and could adversely affect our ability to conduct or to expand ourbusiness” for a more detailed discussion of these permits.

**Foreign andDomestic Operations and Export Sales**

All of our sales areshipped from the manufacturing facilities located in the United States, Franceand Sweden. The following chart represents our net sales based on thegeographic location of the customer.  Thesales recorded for each country are based on the country to which we shippedthe product, regardless of the country of the actual end-user.  Products are usually shipped to thefabricator before being passed on to the end-user.

 

|                          | ** ** | **(Dollars in Thousands)**                          | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|
| ** **               | ** ** | **For the years ended December 31,** | ** ** |
| ** **               | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States            |       | $                                                             | 56,395     |   | $ | 32,126 |   | $ | 24,527 |   |
| Russia                   |       | 11,137                                                        |       | 838 |   | 253 |   |
| Canada                   |       | 10,787                                                        |       | 7,562 |   | 4,924 |   |
| France                   |       | 4,791                                                         |       | 2,417 |   | 1,662 |   |
| India                    |       | 3,764                                                         |       | 140 |   | 71 |   |
| Italy                    |       | 3,466                                                         |       | 2,208 |   | 2,236 |   |
| South Korea              |       | 3,080                                                         |       | 7,771 |   | 409 |   |
| Belgium                  |       | 2,546                                                         |       | 2,495 |   | 2,591 |   |
| Spain                    |       | 2,465                                                         |       | 5,369 |   | 957 |   |
| Germany                  |       | 2,265                                                         |       | 939 |   | 1,978 |   |
| Netherlands              |       | 1,967                                                         |       | 2,757 |   | 1,218 |   |
| China                    |       | 1,055                                                         |       | 3,368 |   | 310 |   |
| Malaysia                 |       | 358                                                           |       | 5,148 |   | 83 |   |
| Australia                |       | 235                                                           |       | 1,940 |   | 5,454 |   |
| Other foreign  countries |       | 9,161                                                         |       | 4,213 |   | 7,492 |   |
| Total                    |       | $                                                             | 113,472    |   | $ | 79,291 |   | $ | 54,165 |   |

 

10

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**Company Information**

Our Internetaddress is http://www.dynamicmaterials.com.  Information contained on our website does notconstitute part of this Annual Report on Form 10-K.

**ITEM 1A.               RiskFactors**

***Risk Factors Related toOur Industry***

**Despite substantial growth in recent yearsin our existing markets, growth in such markets may not continue at the samerate indefinitely.**

From 2004 to 2005 and from2005 to 2006, sales by DMC Clad increased by 47% and 43%, respectively.  However, the explosion-weld cladding marketis dependent upon sales of products for use by customers in a limited number ofheavy industries, including upstream oil and gas, oil refinery, petrochemicals,hydrometallurgy, aluminum production, shipbuilding, power generation andindustrial refrigeration.  Theseindustries tend to be cyclical in nature, and there can be no assurance thatthe construction and other needs of those industries for our products willcontinue to grow at current rates.  Aneconomic slowdown in one or all of these industries, whether due to cyclicalityor other factors, could impact capital expenditures within the industry.  If demand from such industries were todecline or even grow less quickly, our sales would be expected to be affectedproportionately, which may have a material adverse effect on our business,financial condition and results of operations.

**There is a limited availability of sitessuitable for cladding operations.**

Our cladding processinvolves the detonation of large amounts of explosives. As a result, the siteswhere we perform cladding must meet certain criteria, including lack ofproximity to a densely populated area, the specific geological characteristicsof the site, and the ability to comply with local noise and vibration abatementregulations in conducting the process. The process of identifying suitablesites and obtaining permits for using the sites from local government agenciescan be time-consuming and may not be successful.  In addition, we could experience difficultyin obtaining or renewing permits because of resistance from residents in thevicinity of proposed sites.  The failureto obtain required governmental approvals or permits could limit our ability toexpand our cladding business in the future, and the failure to maintain suchpermits would have a material adverse effect on our business, financialcondition and results of operations.

**Certain raw materials we use are subject tosupply shortages due to general economic conditions.**

Although we generally usestandard metals and other materials in manufacturing our products, certainmaterials such as specific grades of carbon steel, titanium, zirconium andnickel can be subject to supply shortages due to general economic conditions orproblems with individual suppliers. While we seek to maintain sufficient alternative supply sources forthese materials, there can be no assurance that we will always be able toobtain sufficient supplies or obtain supplies at acceptable prices withoutproduction delays, additional costs or a loss of product quality.  If we were to fail to obtain sufficientsupplies on a timely basis or at acceptable prices, such loss or failure couldhave a material adverse effect on our business, financial condition and resultsof operations.

**Certain raw materials we use are subject toprice increases due to general economic conditions.**

The markets for certainmetals and other raw materials used in our business are highly variable and arecharacterized by periods of increasing prices. We generally do not hedge commodity prices or enter into forward supplycontracts, and instead we endeavor to pass along price variations to ourcustomers.  We may see a general downturnin business if the price of raw materials increases enough for our customers todelay planned projects or use alternative materials to complete their projects.

11

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**We are subject to extensive governmentregulation and failure to comply could subject us to future liabilities andcould adversely affect our ability to conduct or to expand our business.**

We are subject to extensivegovernment regulation in the United States, France and Sweden, includingguidelines and regulations for the safe manufacture, handling, transport andstorage of explosives provided by the U.S. Bureau of Alcohol, Tobacco andFirearms, the Federal Motor Carrier Safety Regulations set forth by the U.S.Department of Transportation and the Safety Library Publications of theInstitute of Makers of Explosive and similar guidelines of their Europeancounterparts.  In Sweden, the purchase,transport, storage and use of explosives is governed by a permit issued by thePolice Authority of the County of Varmland. (In France, the manufacture and transportation of explosives issubcontracted to Nobel Explosifs France, an affiliate of SNPE, which isresponsible for compliance with regulations established by various State andlocal governmental agencies concerning the handling and transportation ofexplosives.)  We must comply withlicensing and regulations for the purchase, transport, storage, manufacture,handling and use of explosives. In addition, while our shooting facilities in Franceand Sweden are located outdoors, our shooting facility in Pennsylvania islocated in a mine, which subjects us to certain regulations and oversight ofgovernmental agencies that oversee mines.

We are also subject toextensive environmental and occupational safety regulation, as described belowunder “ — Liabilities under environmental and safety laws could result inrestrictions or prohibitions on our facilities, substantial civil or criminalliabilities, as well as the assessment of strict liability and/or joint andseveral liability” and “ — The use of explosives subjects us to additionalregulation, and any accidents or injuries could subject us to significantliabilities.”

The export of certainproducts from the United States is restricted by U.S. export regulations.  These regulations generally prevent theexport of products that could be used by certain end-users, such as those inthe nuclear or biochemical industries.  Inaddition, the use and handling of explosives may be subject to increased regulationdue to heightened concerns about security and terrorism. Such regulations couldrestrict our ability to access and use explosives and increase costs associatedwith the use of such explosives, which could have a material adverse effect onour business, financial condition and results of operations.

Any failure to comply withcurrent and future regulations in the U.S. and Europe could subject us tofuture liabilities. In addition, such regulations could restrict our ability toexpand our facilities, construct new facilities, compete in certain markets orcould require us to incur other significant expenses in order to maintaincompliance. Accordingly, our business, results of operations or financialcondition could be adversely affected by our non-compliance with applicableregulations, by any significant limitations on our business as a result of ourinability to comply with applicable regulations, or by any requirement that wespend substantial amounts of capital to comply with such regulations.

**Liabilities under environmental and safetylaws could result in restrictions or prohibitions on our facilities,substantial civil or criminal liabilities, as well as the assessment of strictliability and/or joint and several liability.**

We are subject to extensiveenvironmental and safety regulation in the United States and Europe. Anyfailure to comply with current and future environmental and safety regulationscould subject us to significant liabilities. In particular, any failure tocontrol the discharge of hazardous materials and wastes could subject us tosignificant liabilities, which could adversely affect our business, results ofoperations or financial condition.

We and all our activities inthe United States are subject to federal, state and local environmental andsafety laws and regulations, including but not limited to, noise abatement andair emissions regulations, the Comprehensive Environmental Response,Compensation and Liability Act of 1980, regulations issued and laws enforced bythe labor and employment departments of the U.S. and the states in which weconduct business, the U.S. Department of Commerce, the U.S. EnvironmentalProtection Agency and by state and county health and safety agencies. InFrance, we and all our activities are subject to state environmental and safetyregulations established by various departments of the French Government,including the Ministry of Labor, the Ministry of Ecology and the Ministry ofIndustry, and to local environmental and safety regulations and administrativeprocedures established by DRIRE (Direction Régionale de l’Industrie, de laRecherche et de l’Environnement) and the Préfecture des PyrénéesOrientales.  In Sweden, we and all our 

12

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activitiesare subject to various safety and environmental regulations, including thoseestablished by the Work Environment Authority of Sweden in its Work EnvironmentAct.  In addition, our shootingoperations in France and Sweden may be particularly vulnerable to noiseabatement regulations because these operations are primarily conductedoutdoors.

Changes in, or compliancewith, environmental and safety regulations could inhibit or interrupt ouroperations, or require modifications to our facilities. Any actual or allegedviolations of environmental and safety laws could result in restrictions orprohibitions on our facilities, substantial civil or criminal sanctions, aswell as the assessment of strict liability and/or joint and several liabilityunder applicable law.  Under certainenvironmental laws, we could be held responsible for all of the costs relatingto any contamination at our or our predecessor’s past or present facilities andat third party waste disposal sites.  Wecould also be held liable for any and all consequences arising out of humanexposure to hazardous substances or other environmental damage.  Accordingly, environmental, health or safetymatters may result in significant unanticipated costs or liabilities.

**The use of explosives subjects us toadditional regulation, and any accidents or injuries could subject us tosignificant liabilities.**

Our operations involve thedetonation of large amounts of explosives. As a result, we are required to use specific safety precautions underU.S. Occupational Safety and Health Administration guidelines and guidelines ofsimilar entities in France and Sweden. These include precautions which must be taken to protect employees fromexposure to sound and ground vibration or falling debris associated with thedetonation of explosives.  There is arisk that an accident or death could occur in one of our facilities.  Any accident could result in significantmanufacturing delays, disruption of operations or claims for damages resultingfrom death or injuries, which could result in decreased sales and increasedexpenses. To date, we have not incurred any significant delays, disruptions orclaims resulting from accidents at our facilities.  The potential liability resulting from anyaccident or death, to the extent not covered by insurance, may require us touse other funds to satisfy our obligations and could cause our business tosuffer.  See “ — Our use of explosives isan inherently dangerous activity that could lead to temporary or permanentclosure of our shooting sites” below.

**Our use of explosives is an inherently dangerousactivity that could lead to temporary or permanent closure of our shootingsites.**

We use a large amount ofexplosives in connection with the creation of clad metals and the shocksynthesis of diamonds.  The use ofexplosives is an inherently dangerous activity. Explosions, even if occurring as intended, can lead to damage to theshooting facility or to equipment used at the facility or injury to persons atthe facility. If a person were injured or killed in connection with suchexplosives, or if equipment at the mine or either of the outdoor locations weredamaged or destroyed, we might be required to suspend our operations for aperiod of time while an investigation is undertaken or repairs are made.  Such a delay might impact our ability to meetthe demand for our products.  Inaddition, if the mine were seriously damaged, we might not be able to locate asuitable replacement site to continue our operations.

***Risk Factors Related to Dynamic Materials Corporation***

**Our operating results fluctuate from quarterto quarter.**

We have experienced, andexpect to continue to experience, fluctuations in annual and quarterlyoperating results caused by various factors, including the timing and size oforders by major customers, customer inventory levels, shifts in product mix,acquisitions and divestitures, and general economic conditions.  Theupstream oil and gas, oil refinery, chemical and petrochemical,hydrometallurgy, aluminum production, shipbuilding, power generation,industrial refrigeration and other diversified industries to which we sell ourproducts are, to varying degrees, cyclical and tend to decline in response tooverall declines in industrial production. As a result, our business is also cyclical, and the demand for ourproducts by these customers depends, in part, on overall levels of industrialproduction. Any future material weakness in demand in any of these industriescould materially reduce our revenues and profitability. In addition, the threatof terrorism and other geopolitical uncertainty could have a negative impact onthe global economy, the industries we serve and our operating results.

13

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We typically do not obtainlong-term volume purchase contracts from our customers. Quarterly sales andoperating results, therefore, depend on the volume and timing of backlogs aswell as bookings received during the quarter. Significant portions of our operating expenses are fixed, and plannedexpenditures are based primarily on sales forecasts and product developmentprograms. If sales do not meet our expectations in any given period, theadverse impact on operating results may be magnified by our inability to adjustoperating expenses sufficiently or quickly enough to compensate for such ashortfall. Results of operations in any period should not be consideredindicative of the results to be expected for any future period. Fluctuations inoperating results may also result in fluctuations in the price of our commonstock.  See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

**Customers have the right to change ordersuntil products are completed.**

Customers have the right tochange orders after they have been placed. If orders are changed, the extra expenses associated with the changewill be passed on to the customer. However, because a change in an order may delay completion of theproject, recognition of income for the project may also be delayed.

**There is no assurance that we will continueto compete successfully against other clad and welding companies.**

Our explosion-welded cladproducts compete with explosion-welded clad products made by othermanufacturers in the clad metal business located throughout the world and withclad products manufactured using other technologies. Our combined North Americanand European operations typically supply explosion-welded clad to the worldwidemarket. There is one other well-known explosion-welded clad supplier worldwide,a division of Asahi-Kasei Corporation of Japan. There are also a number ofsmaller companies worldwide with explosion-welded clad manufacturingcapability, including several companies in China.  There are currently no other significantNorth American based explosion-welded clad suppliers. We focus strongly onreliability, product quality, on-time delivery performance, and low costmanufacturing to minimize the potential of future competitive threats.  However, there is no guarantee we will beable to maintain our competitive position.

Explosion-welded cladproducts also compete with those manufactured by rollbond and weld overlaycladding processes. In rollbond technology, the clad and base metal are bondedtogether during a hot rolling process in which slab is converted to plate. Inweld overlay, which is typically performed by our fabricator customers, thecladding layer is deposited on the base metal through a fusion welding process.The technical and commercial niches of each cladding process are wellunderstood within the industry and vary from one world market location toanother.  Our products compete with weldoverlay clad products manufactured by a significant number of our fabricatorcustomers.

AMK Welding competesprincipally with other domestic companies that provide welding services to theaircraft engine and power generation industries.  Some of these competitors have establishedpositions in the market and long standing relationships with customers. Toremain competitive, we must continue to develop and provide technologicallyadvanced welding, heat-treat and inspection services, maintain quality levels,offer flexible delivery schedules, and compete favorably on the basis of price.We compete against other welding companies on the basis of quality, performanceand cost. There can be no assurance that we will continue to compete successfullyagainst these companies.

**We are dependent on a relatively smallnumber of customers for a significant portion of our net sales.**

A significant portion of ournet sales is derived from a relatively small number of customers although salesto no one customer exceeded 10% during the last three years. We expect tocontinue to depend upon our principal customers for a significant portion ofour sales, although there can be no assurance that our principal customers willcontinue to purchase products and services from us at current levels, if atall. The loss of one or more major customers or a change in their buyingpatterns could have a material adverse effect on our business, financialcondition and results of operations. In past years, the majority of DMC Clad’srevenues have been derived from customers in the upstream oil and gas, oilrefinery, petrochemicals, hydrometallurgy, aluminum production, shipbuilding,power generation and industrial refrigeration industries and the majority ofAMK Welding’s revenues have been derived from customers in the aircraft engineand 

14

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powergeneration industries. Economic downturns in these industries could have amaterial adverse effect on our business, financial condition and results ofoperations.

AMK Welding, which contributesapproximately 5% to our total sales, continues to rely primarily on onecustomer for the majority of its sales. This customer and AMK Welding haveentered into a long-term supply agreement for certain of the services providedto this customer.  Any termination of orsignificant reduction in AMK Welding’s business relationship with this customercould have a material adverse effect on AMK Welding’s business and financialcondition.

**Failure to attract and retain key personnelcould adversely affect our current operations.**

Our continued successdepends to a large extent upon the efforts and abilities of key managerial andtechnical employees. The loss of services of certain of these key personnelcould have a material adverse effect on our business, results of operations andfinancial condition. There can be no assurance that we will be able to attractand retain such individuals on acceptable terms, if at all, and the failure todo so could have a material adverse effect on our business, financial conditionand results of operations.

**Work stoppages and other labor relationsmatters may make it substantially more difficult or expensive for us to produceour products, which could result in decreased sales or increased costs, eitherof which would negatively impact our financial condition and results ofoperations.**

We are subject to the riskof work stoppages and other labor relations matters, particularly in France andSweden, where some of our employees are unionized. The employees at our U.S.facility, where the majority of products are manufactured, are not unionized.While we believe our relations with employees are satisfactory, any prolongedwork stoppage or strike at any one of our principal facilities could have anegative impact on our business, financial condition or results of operations.We most recently experienced a one-week work stoppage in 2005 at our facilityin France. This strike did not materially impact operations, but we cannotassure you that a work stoppage at one or more of our facilities will notmaterially impair our ability to operate our business in the future.

**The unsuccessful integration of a businesswe acquire could have a material adverse effect on operating results.**

We continue to considerpossible acquisitions as part of our growth strategy. Any potential acquisitionmay require additional debt or equity financing, resulting in additionalleverage and dilution to existing stockholders. We cannot assure you that anyfuture acquisition will be consummated, or that if consummated that we will beable to integrate such acquisition successfully without a material adverseeffect on our financial condition or results of operations.

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**ITEM 1B.           Unresolved Staff Comments**

None.

**ITEM 2.               Properties**

Our corporate headquartersare located in Boulder, Colorado.  Thelease for the office space is currently set to expire on February 28, 2010,with renewal options through February 28, 2016.

We own our principaldomestic manufacturing site, which is located in Mount Braddock,Pennsylvania.  We currently lease ouronly domestic shooting site, which is located in Dunbar, Pennsylvania.  The shooting site in Dunbar Pennsylvaniasupports our manufacturing facility in Mount Braddock, Pennsylvania.  The lease for the Dunbar property will expireon December 15, 2010, but we have options to renew the lease that extendthrough December 15, 2029.  Our Frenchsubsidiary, Nobelclad, owns the land and the buildings housing its operationsin Rivesaltes, France and Tautavel, France (except for a small portion inTautavel that is leased).  This leaseexpires on December 31, 2011 and may be extended.  Our Swedish subsidiary, Nitro Metall, ownsthe land and buildings housing its manufacturing operations in Likenas,Sweden.  The buildings and land at theNitro Metall shooting site in Likenas, Sweden and the sales office in Filipstad,Sweden are leased. The lease in Filipstad is automatically renewed every year.  The sites in Pennsylvania, France and Swedenare part of the Explosive Metalworking segment. In addition, we own the land and buildings housing the operations of AMKWelding in South Windsor, Connecticut.  
| **Location**               | ** ** | **Facility Type**                                                           | ** ** | **Facility Size** | ** ** | **Owned/Leased**                | ** ** | **Expiration Date of Lease  (if applicable)**                      |
|----------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|--------------------------------------------------------------------|
| Boulder, Colorado          |       | Corporate and Sales Office                                                  |       | 9,140 sq. ft.     |       | Leased                          |       | February 28, 2010, with renewal options through  February 28, 2016 |
| Mt. Braddock, Pennsylvania |       | Clad Plate Manufacturing                                                    |       | 48,000 sq. ft.    |       | Owned                           |       |                                                               |
| Dunbar, Pennsylvania       |       | Clad Plate Shooting Site                                                    |       | 322 acres         |       | Leased                          |       | December 15, 2010, with renewal options through December  15, 2029 |
| Rivesaltes, France         |       | Clad Plate Manufacturing, Nobelclad Europe Sales and  Administration Office |       | 53,000 sq. ft.    |       | Owned                           |       |                                                               |
| Tautavel, France           |       | Clad Shooting Site                                                          |       | 114 acres         |       | 107 acres owned, 7 acres leased |       | December 31, 2011                                                  |
| Likenas, Sweden            |       | Clad Plate Manufacturing                                                    |       | 26,000 sq. ft.    |       | Owned                           |       |                                                               |
| Likenas, Sweden            |       | Clad Plate Shooting Site                                                    |       | 15 acres          |       | Leased                          |       | January 1, 2016                                                    |
| Filipstad, Sweden          |       | Nitro Metall Sales Office                                                   |       | 850 sq. ft.       |       | Leased                          |       | January 1, 2008 (renews annually)                                  |
| South Windsor, Connecticut |       | AMK Welding                                                                 |       | 21,000 sq. ft.    |       | Owned                           |       |                                                               |

 

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**ITEM 3**.**              Legal Proceedings**

Although we may inthe future become a party to litigation, there are no pending legal proceedingsagainst us.

**ITEM 4**.**               Submission of Matters to a Voteof Security Holders**

No matters weresubmitted to security holders for vote during the fourth quarter of the fiscalyear ended December 31, 2006.

 

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**PART II**
| **ITEM 5.** | **Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities** |
|-------------|------------------------------------------------------------------------------------------------------------------------|

 

Our common stockis publicly traded on The Nasdaq National Market (“Nasdaq”) under the symbol “BOOM.”  The following table sets forth quarterly highand low sales prices for the common stock during our last two fiscal years, asreported by Nasdaq, adjusted to give effect to the 2-for-1 stock spliteffective October 13, 2005.

|                | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2006**       |       |     |       |    |       |
| ** **     |       |     |       |    |       |
| First Quarter  |       | $        | 38.49      |    | $          | 27.03 |   |
| Second Quarter |       | $        | 43.20      |    | $          | 25.05 |   |
| Third Quarter  |       | $        | 37.84      |    | $          | 28.15 |   |
| Fourth Quarter |       | $        | 33.69      |    | $          | 27.55 |   |
|           |       |     |       |    |       |
| **2005**       |       |     |       |    |       |
| ** **     |       |     |       |    |       |
| First Quarter  |       | $        | 19.50      |    | $          | 4.33 |   |
| Second Quarter |       | $        | 22.61      |    | $          | 11.00 |   |
| Third Quarter  |       | $        | 26.25      |    | $          | 17.22 |   |
| Fourth Quarter |       | $        | 32.60      |    | $          | 18.27 |   |

 

As ofFebruary 28, 2007, there were approximately 330 holders of record of our commonstock.

We declared and paid a $0.10and $0.15 per share dividend in 2005 and 2006 respectively.  We may pay annual dividends subject tocapital availability and periodic determinations that cash dividends are in thebest interests of our stockholders, but we cannot assure you that such paymentswill continue.  Future dividends may beaffected by, among other items, our views on potential future capitalrequirements, future business prospects, changes in federal income tax law andany other factors that our Board of Directors deems relevant.  Any determination to pay cash dividends willbe at the discretion of the Board of Directors.

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# FINANCIAL PERFORMANCE

The followinggraph compares the performance of the common stock with the NasdaqNon-Financial Stocks Index and the Nasdaq Composite (US) Index. The comparisonof total return (change in year end stock price plus reinvested dividends) foreach of the years assumes that $100 was invested on December 31, 2001 in eachof the Company, Nasdaq Non-Financial Stocks Index and the Nasdaq Composite (US)Index with investment weighted on the basis of market capitalization.  Historical results are not necessarilyindicative of future performance.
| ** **                          | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| **Total Return Analysis** | ** ** | **12/31/01** | ** ** | **12/31/02** | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/30/05** | ** ** | **12/29/06** | ** ** |
| **Dynamic Materials Corporation**   |       | $            | 100        |         | $          | 60.00        |       | $            | 75.70      |         | $          | 307.34       |       | $ | 1,520.00 |   | $ | 1,422.78 |   |
| **Nasdaq Non-Financial Stocks**     |       | $            | 100        |         | $          | 65.33        |       | $            | 100.01     |         | $          | 107.86       |       | $ | 110.30 |   | $ | 120.97 |   |
| **Nasdaq Composite (US)**           |       | $            | 100        |         | $          | 69.13        |       | $            | 103.36     |         | $          | 112.49       |       | $ | 114.88 |   | $ | 126.22 |   |

 

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**ITEM 6.  Selected Financial Data**

The followingselected financial data should be read in conjunction with the ConsolidatedFinancial Statements, including the related Notes, and “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”
| ** **                                                                         | ** ** | **(Dollars in Thousands, Except Per Share Data)** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **Year Ended December 31,**                                      | ** ** |
| ** **                                                                         | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Statement of Operations**                                                        | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                          |       | $                                                                               | 113,472    |   | $ | 79,291 |   | $ | 54,165 |   | $ | 35,779 |   | $ | 38,880 |   |
| Cost of products sold                                                              |       | 71,439                                                                          |       | 55,856 |   | 40,559 |   | 26,802 |   | 26,673 |   |
| Gross profit                                                                       |       | 42,033                                                                          |       | 23,435 |   | 13,606 |   | 8,977 |   | 12,207 |   |
| Cost and expenses                                                                  |       | 11,930                                                                          |       | 7,667 |   | 6,718 |   | 5,661 |   | 5,011 |   |
| Income from operations                                                             |       | 30,103                                                                          |       | 15,768 |   | 6,888 |   | 3,316 |   | 7,196 |   |
| Other (income) expense,  net                                                       |       | (505                                                                            | )          | 163 |   | 524 |   | 527 |   | 742 |   |
| Income before income  taxes                                                        |       | 30,608                                                                          |       | 15,605 |   | 6,364 |   | 2,789 |   | 6,454 |   |
| Income tax provision                                                               |       | 11,341                                                                          |       | 5,233 |   | 1,961 |   | 1,504 |   | 2,528 |   |
| Income from continuing  operations                                                 |       | 19,267                                                                          |       | 10,372 |   | 4,403 |   | 1,285 |   | 3,926 |   |
| Discontinued  operations, net of tax                                               |       | 1,497                                                                           |       | — |   | (1,570 | ) | (1,993 | ) | (1,437 | ) |
| Cumulative  effect of change in accounting principle, net of tax benefit of $1,482 |       | —                                                                          |       | — |   | — |   | — |   | (2,318 | ) |
| Net income (loss)                                                                  |       | $                                                                               | 20,764     |   | $ | 10,372 |   | $ | 2,833 |   | $ | (708 | ) | $ | 171 |   |
|                                                                               |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Income from continuing  operations per share:                                      |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | $                                                                               | 1.63       |   | $ | 0.92 |   | $ | 0.43 |   | $ | 0.13 |   | $ | 0.39 |   |
| Diluted                                                                            |       | $                                                                               | 1.58       |   | $ | 0.86 |   | $ | 0.41 |   | $ | 0.13 |   | $ | 0.38 |   |
| Net income (loss) per  share:                                                      |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | $                                                                               | 1.75       |   | $ | 0.92 |   | $ | 0.28 |   | $ | (0.07 | ) | $ | 0.02 |   |
| Diluted                                                                            |       | $                                                                               | 1.70       |   | $ | 0.86 |   | $ | 0.27 |   | $ | (0.06 | ) | $ | 0.02 |   |
| Weighted average number  of shares outstanding:                                    |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Basic                                                                              |       | 11,841,373                                                                      |       | 11,290,053 |   | 10,269,080 |   | 10,134,648 |   | 10,084,764 |   |
| Diluted                                                                            |       | 12,213,075                                                                      |       | 12,086,884 |   | 10,968,090 |   | 10,621,612 |   | 10,574,102 |   |
|                                                                               |       |                                                                            |       |   |   |   |   |   |   |   |   |
| DIVIDENDS DECLARED PER  COMMON SHARE                                               |       | $                                                                               | 0.15       |   | $ | 0.10 |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                               |       |                                                                            |       |   |   |   |   |   |   |   |   |
| **Financial Position**                                                             | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                                                                     |       | $                                                                               | 63,847     |   | $ | 36,552 |   | $ | 26,246 |   | $ | 14,911 |   | $ | 15,237 |   |
| Total assets                                                                       |       | 84,973                                                                          |       | 55,311 |   | 43,753 |   | 35,262 |   | 33,698 |   |
| Current liabilities                                                                |       | 25,297                                                                          |       | 14,838 |   | 16,962 |   | 10,114 |   | 8,382 |   |
| Long-term debt                                                                     |       | 382                                                                             |       | 2,221 |   | 2,906 |   | 4,155 |   | 9,279 |   |
| Other non-current  liabilities                                                     |       | 1,714                                                                           |       | 3,297 |   | 3,815 |   | 5,409 |   | 474 |   |
| Stockholders’ equity                                                          |       | 57,580                                                                          |       | 34,955 |   | 20,070 |   | 15,584 |   | 15,563 |   |

 

20

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Selected unauditedquarterly financial data for the years ended December 31, 2006 and 2005 ispresented below:

 
| ** **                                             | ** ** | **(Dollars in Thousands, Except Per Share Data)** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                                                      | ** ** |
| ** **                                             | ** ** | **Year ended December 31, 2006**                            | ** ** |
| ** **                                             | ** ** | **Quarter ended**                                                          | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** |
| ** **                                             | ** ** | **March 31,**                                                              | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                              |       | $                                                                               | 25,175     |   | $ | 27,754 |   | $ | 24,852 |   | $ | 35,691 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Gross profit                                           |       | $                                                                               | 9,281      |   | $ | 9,921 |   | $ | 8,310 |   | $ | 14,521 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Income from continuing  operations                     |       | $                                                                               | 4,139      |   | $ | 5,005 |   | $ | 3,690 |   | $ | 6,433 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Net income                                             |       | $                                                                               | 5,496      |   | $ | 5,005 |   | $ | 3,690 |   | $ | 6,573 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Income from continuing  operations per share - basic   |       | $                                                                          | 0.35       |   | $  | 0.42 |   | $  | 0.31 |   | $  | 0.54 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Income from continuing  operations per share - diluted |       | $                                                                          | 0.34       |   | $  | 0.41 |   | $  | 0.30 |   | $  | 0.53 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Net income per share -  basic                          |       | $                                                                               | 0.47       |   | $ | 0.42 |   | $ | 0.31 |   | $ | 0.55 |   |
|                                                   |       |                                                                            |       |   |   |   |   |   |   |
| Net income per share - diluted                         |       | $                                                                               | 0.45       |   | $ | 0.41 |   | $ | 0.30 |   | $ | 0.54 |   |

 
| ** **                                             | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **Quarter ended**                               | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** |
| ** **                                             | ** ** | **March 31,**                                   | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                              |       | $                                                    | 17,510     |   | $ | 18,376 |   | $ | 20,238 |   | $ | 23,167 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Gross profit                                           |       | $                                                    | 4,650      |   | $ | 5,215 |   | $ | 6,268 |   | $ | 7,302 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Income from continuing  operations                     |       | $                                                    | 1,648      |   | $ | 2,115 |   | $ | 3,152 |   | $ | 3,457 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Net income                                             |       | $                                                    | 1,648      |   | $ | 2,115 |   | $ | 3,152 |   | $ | 3,457 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Income from continuing  operations per share - basic   |       | $                                               | 0.15       |   | $  | 0.19 |   | $  | 0.27 |   | $  | 0.29 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Income from continuing  operations per share - diluted |       | $                                               | 0.14       |   | $  | 0.18 |   | $  | 0.26 |   | $  | 0.28 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Net income per share -  basic                          |       | $                                                    | 0.15       |   | $ | 0.19 |   | $ | 0.27 |   | $ | 0.29 |   |
|                                                   |       |                                                 |       |   |   |   |   |   |   |
| Net income per share - diluted                         |       | $                                                    | 0.14       |   | $ | 0.18 |   | $ | 0.26 |   | $ | 0.28 |   |

 

Total net incomeper share for the 2006 and 2005 quarters does not equal net income per sharefor the respective years as the per share amounts for each quarter and for eachyear are computed based on their respective discrete periods.

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**ITEM 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

Thefollowing discussion should be read in conjunction with our historicalconsolidated financial statements and notes, as well as the selected historicalconsolidated financial data included elsewhere in this annual report.

Unless stated otherwise, alldollar figures in this discussion are presented in thousands (000’s).

**ExecutiveOverview**

Our business isorganized into two segments:  ExplosiveMetalworking (which we also refer to as DMC Clad) and AMK Welding.  In 2006, Explosive Metalworking accounted formore than 95% of our net sales and 96% of our income from operations ofcontinuing operations before consideration of stock-based compensation expense,which is not allocated to our business segments.  In 2005 and 2004, Explosive Metalworkingaccounted for more than 95% and 94%, respectively, of our net sales, and morethan 95% of income from operations of continuing operations.

Our 2006 net salesincreased 43.1% compared to 2005, reflecting year-to-year net sales increasesof 43.4% and 37.8% for our Explosive Metalworking and AMK Welding segments,respectively.  Our income from operationsof continuing operations increased 90.9%, to $30,103 in 2006 from $15,768 in2005, reflecting a $14,445 improvement in Explosive Metalworking’s operatingincome and a $550 improvement in AMK Welding’s operating income.  Income from continuing operations increased85.8%, to $19,267 in 2006 from $10,372 in 2005. Our net income increased to $20,764 in 2006 from $10,372 in 2005.  Our 2006 net income included $1,497 of incomefrom discontinued operations, net of tax, relating to the sale of the SpinForge real estate option in the first quarter and the sale of leasedmanufacturing equipment and tooling associated with the Spin Forge business inthe fourth quarter.  See detaileddiscussion below under “income from discontinued operations”.

*Net sales*

ExplosiveMetalworking’s net sales are generated principally from sales of clad metalplates and sales of transition joints, which are made from clad plates, tocustomers that fabricate industrial equipment for various industries, includingupstream oil and gas, oil refinery, petrochemicals, hydrometallurgy, aluminumproduction, shipbuilding, power generation, industrial refrigeration andsimilar industries.  Demand for our cladmetal products in the United States is largely driven by plant maintenance andretrofit projects at existing chemical processing, petrochemical processing andoil refining facilities, as well as new plants and large plant expansionprojects. In contrast to the U.S. market, demand for our clad products inEurope and Asia is more dependent on new construction projects, such as thebuilding of new PTA plants in different parts of the world, including China,and on sales of electrical transition joints that are used in the aluminumproduction industry.

AMK Welding’s netsales are generated from welding, heat treatment and inspection services thatare provided with respect to customer-supplied parts for customers primarilyinvolved in the power generation industry and aircraft engine markets.

A significantportion of our net sales is derived from a relatively small number ofcustomers; therefore, the failure to complete existing contracts on a timelybasis, and to receive payment for such services in a timely manner, or to enterinto future contracts at projected volumes and profitability levels couldadversely affect our ability to meet cash requirements exclusively throughoperating activities. We attempt to minimize the risk of losing customers orspecific contracts by continually improving product quality, delivering producton time and competing favorably on the basis of price.

DMC Clad’sbusiness is cyclical since it is linked to its customers’ end-marketactivity.  For example, the constructioncycle for new manufacturing capacity in the chemical industry has historicallybeen one characterized by significant amplitude.  It is driven both by global economic demandgrowth and capacity utilization.  Ascapacity starts to become tight for various chemicals and prices begin to rise,new manufacturing capacity is added in relatively large

22

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incremental amounts.  Excess capacity drives prices down andcapacity utilization drops. This has historically been a seven- to ten-yearcycle.

*Grossprofit and cost of products sold*

Cost of productssold for Explosive Metalworking include the cost of metals and alloys used tomanufacture clad metal plates, the cost of explosives, employee compensationand benefits, freight, outside processing costs, depreciation of manufacturingfacilities and equipment, manufacturing supplies and other manufacturingoverhead expenses.

AMK Welding’s costof products sold consists principally of employee compensation and benefits,welding supplies (wire and gas), depreciation of manufacturing facilities andequipment, outside services and other manufacturing overhead expenses.

*Discontinuedoperations*

In September 2004,we completed the sale of our Spin Forge division and recorded a loss fromdiscontinued operations of $1,570, net of taxes, including a net of taxoperating loss of $783 and a net of tax loss on the divesture transactions of$787.  On January 10, 2006, we sold ouroption rights to purchase the Spin Forge real estate to the property owner for$2,300.  We recorded a pre-tax gain ofapproximately $2,197 on this transaction, which was reported as discontinuedoperations, net of related taxes, in the first quarter of 2006.  In December 2006, we sold the Spin Forgeequipment to the buyer of that division who had previously been leasing thatequipment from us.  The sale of thisequipment resulted in an additional pre-tax gain on discontinued operations of$228.  We reported a net of tax income of$1.497 for the full year 2006 as a result of these two transactions.

*Incometaxes*

Our effectiveincome tax rate increased to 37.1% in 2006 from 33.5% in 2005.  Income tax provisions on the 2006 and 2005earnings of Nobelclad and Nitro Metall have been provided based upon therespective French and Swedish statutory tax rates.  Our effective tax rate for 2006 is higherthan those experienced in 2005 and 2004 as a result of the recognition in 2005and 2004 of U.S. tax benefits relating to research and development tax credits,extraterritorial income exclusions and foreign tax credits.  Going forward, based upon existing taxregulations and current federal, state and foreign statutory tax rates, weexpect our effective tax rate on our consolidated pre-tax income to rangebetween 37% and 38%**.**

*Backlog*

We use backlog as aprimary means of measuring the immediate outlook for our business.  We define “backlog” at any given point intime to consist of all firm, unfulfilled purchase orders and commitments atthat time.  Generally speaking, we expectto fill most backlog orders within the following 12 months.  Fromexperience, most firm purchase orders and commitments are realized.  However, since orders may be rescheduled orcanceled, and a significant portion of our net sales is derived from a smallnumber of customers, backlog is not necessarily indicative of future saleslevels.  Moreover, we cannot be sure ofwhen during the future 12-month period we will be able to recognize revenuecorresponding to our backlog nor can we be sure that revenues corresponding toour backlog will not fall into periods beyond the 12-month horizon.

Our backlog withrespect to the Explosion Metalworking segment increased to approximately $68.8million at December 31, 2006 from approximately $42.0 million at December 31,2005 and $27.5 at December 31, 2004.

23

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**Year ended December 31, 2006 compared to YearEnded December 31, 2005**

*Net sales*
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Net sales  |       | $          | 113,472    |       | $          | 79,291     |       | $              | 34,181     |   | 43.1 | % |
|            |            |            |            |            |            |            |            |                |            |  |  |  |

 

Net sales for 2006increased 43.1% to $113,472 from $79,291 in 2005. Explosive Metalworking salesincreased 43.4% to $108,362 in 2006 (95.5% of total sales) from $75,582 in 2005(95.3% of total sales).  The year-to-yearincrease in worldwide Explosive Metalworking sales is principally attributableto the improved economic condition of the industries that this business segmentserves.

AMK Weldingcontributed $5,110 to 2006 sales (4.5% of total sales) versus sales of $3,709in 2005 (4.7% of total sales).

*Grossprofit*
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Gross profit                          |       | $          | 42,033     |       | $          | 23,435     |       | $              | 18,598     |   | 79.4 | % |
| Consolidated gross profit margin rate |       | 37.0       | %          | 29.6       | %          |       |       |           |       |
|                                       |            |            |            |            |            |            |            |                |            |  |  |  |

 

Grossprofit increased by 79.4% to $42,033 in 2006 from $23,435 in 2005.  Our 2006 consolidated gross profit marginrate increased to 37.0% from 29.6% in 2005. The gross profit margin for Explosive Metalworking increased from 29.8%in 2005 to 37.2% in 2006 and the gross profit margin for AMK Welding increasedto 34.9% in 2006 from 25.2% in 2005.  Thegross margin improvements for Explosive Metalworking relates primarily to thesales increases discussed above and the resultant more favorable absorption offixed manufacturing overhead expenses. This gross margin increase also reflects favorable changes in productmix and higher average prices in 2006 with respect to both our U.S. andEuropean operations.  During 2006, thegross margins that we reported in our quarterly financial statements rangedfrom a low of 33.4% in the third quarter to a high of 40.7% in the fourthquarter.  The high fourth quarter grossmargin rates reflects the impact of favorable margin levels on an $11 millioncontract that shipped during the quarter, which involved complex materialsengineering and a tight delivery schedule We expect to see continued fluctuations in our quarterly gross marginrates during 2007 that result from anticipated fluctuations in quarterly salesvolume and changes in product mix.

*General and administrative expenses*
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| General &  administrative expenses |       | $          | 5,802      |       | $          | 4,051      |       | $              | 1,751      |   | 43.2 | % |
| Percentage of net sales                |       | 5.1        | %          | 5.1        | %          |       |       |           |       |
|                                        |            |            |            |            |            |            |            |                |            |  |  |  |

 

General andadministrative expenses increased by $1,751 or 43.2%, to $5,802 in 2006 from $4,051in 2005.    This increase in general andadministrative expenses reflects stock-based compensation expense of $493, animpact of $352 from annual salary adjustments and staffing changes, a $371increase in accrued incentive compensation expense and an aggregate increase of$190 in legal, consulting, audit, tax advisory, and investor relationsexpenses.  As a percentage of net sales,general and administrative expenses remained flat at 5.1% in both 2006 and2005.

*Sellingexpenses*
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Selling expenses        |       | $          | 6,128      |       | $          | 3,616      |       | $              | 2,512      |   | 69.5 | % |
| Percentage of net sales |       | 5.4        | %          | 4.6        | %          |       |       |           |       |
|                         |            |            |            |            |            |            |            |                |            |  |  |  |

 

Selling expenses,which include sales commissions of $2,528 in 2006 and $779 in 2005, increasedby 69.5% to $6,128 in 2006 from $3,616 in 2005. The $1,749 increase in sales commissions is primarily attributable tolarge 

24

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consultingfees and commissions of approximately $1,650 paid in connection  with an 11 million order that shipped duringthe fourth quarter and  which involvedcomplex materials engineering and a tight delivery schedule.  The remaining $763 increase in sellingexpenses reflects stock-based compensation expense of $96, an impact of $302from annual salary adjustments and staffing changes and a $160 increase inaccrued incentive compensation expense. As a percentage of net sales, selling expenses increased to 5.4% in 2006from 4.6% in 2005 due to the large increase in sales commissions that relatesprincipally to one order.  Excludingsales commissions, selling expenses as a percentage of sales decreased to 3.2%in 2006 from 3.6% in 2005.

*Incomefrom operations of continuing operations*
| ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income from operations****of continuing operations |       | $          | 30,103     |       | $          | 15,768     |       | $              | 14,335     |   | 90.9 | % |
|                                                              |            |            |            |            |            |            |            |                |            |  |  |  |

 

Income fromoperations increased by 90.9% to $30,103 in 2006 from $15,768 in 2005.  Explosive Metalworking reported income fromoperations of $29,605 in 2006 as compared to $15,160 in 2005.  This 95.3% increase is largely attributableto the 43.4% sales increase discussed above.

AMKWelding reported income from operations of $1,158 in 2006, an increase of 90.5%from the $608 that it reported in 2005, which increase follows the 37.8% salesincrease.

Incomefrom operations of continuing operations in 2006 includes $660 of stock-basedcompensation expense (an expense we did not have in 2005).  This expense is not allocated to our businesssegments and thus is not included in the above 2006 operating income totals forExplosive Metalworking and AMK Welding. Stock-based compensation expense in 2007 is expected to be at leastdouble the amount that we reported in 2006.

*Interest income (expense), net*
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Interest income (expense),  net |       | $          | 620        |       | $          | (156       | )          | $              | 776        |   | NM |   |
|                                 |            |            |            |            |            |            |            |                |            |  |  |  |

 

We recorded net interestincome of $620 in 2006 compared to net interest expense of $156 in 2005, animprovement of $776.  This change in netinterest income (expense) reflects a significant decrease in average outstandingborrowings year-to-year and the large cash balances we are currently carrying.

*Incometax provision*
| ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income tax provision |       | $          | 11,341     |       | $          | 5,233      |       | $              | 6,108      |   | 116.7 | % |
| Effective tax rate   |       | 37.1       | %          | 33.5       | %          |       |       |           |       |
|                      |            |            |            |            |            |            |            |                |            |  |  |  |

 

We recorded an income tax provision of $11,341 in 2006compared to $5,233 in 2005.  Theeffective tax rate increased to 37.1% in 2006 from 33.5% in 2005.  The 2006 and 2005 income tax provisionsinclude $8,167 and $3,514, respectively, related to U.S. taxes, with theremainder relating to foreign taxes associated with the operations of Nobelcladand its Swedish subsidiary, Nitro Metall.

*Incomefrom discontinued operations*
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income from  discontinued operations |       | $          | (1,497     | )          | $          | —     |       | $              | (1,497     | ) | NA |   |
|                                      |            |            |            |            |            |            |            |                |            |  |  |  |

 

We completed thedivestiture of our Spin Forge division in September 2004.  Under the principal divestiture agreement, wesold the assets of the Spin Forge division to a third party, excluding certainequipment and real estate which were 

25

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leased or subleased tothe buyer.  We held a purchase option onthe Spin Forge real estate that allowed us to purchase the real estate for$2,880, a price that was below the real estate’s appraised value.  We completed the sale of the purchase optionon the Spin Forge real estate on January 10, 2006.  The option rights were sold to the propertyowner for $2,300 on January 10, 2006.  Werecorded a pre-tax gain of approximately $2,197 on this transaction, which wasreported in discontinued operations, net of related taxes.  In December 2006, the third party purchaserof the Spin Forge business purchased the majority of the leased equipment whilethe remainder of the leased assets was liquidated by the Company.  These transactions resulted in a pre-tax gainof $228, which was recorded in discontinued operations, net of related taxes.

**Year ended December 31, 2005 compared to YearEnded December 31, 2004**

*Net sales*
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** ** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Net sales  |       | $          | 79,291     |       | $          | 54,165     |       | $              | 25,126     |   | 46.4 | % |
|            |            |            |            |            |            |            |            |                |            |  |  |  |

 

Net sales for 2005increased 46.4% to $79,291 from $54,165 in 2004. Explosive Metalworking salesincreased 47.1% to $75,582 in 2005 (95% of total sales) from $51,375 in 2004(95% of total sales).  The year-to-yearincrease in worldwide Explosive Metalworking sales is principally attributableto the improved economic condition of the industries that this business segmentserves.

AMK Weldingcontributed $3,709 to 2005 sales (5% of total sales) versus sales of $2,790 in2004 (5% of total sales).

*Grossprofit*
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Gross profit                           |       | $          | 23,435     |       | $          | 13,606     |       | $              | 9,829      |   | 72.2 | % |
| Consolidated gross  profit margin rate |       | 29.6       | %          | 25.1       | %          |       |       |           |       |
|                                        |            |            |            |            |            |            |            |                |            |  |  |  |

 

Grossprofit increased by 72.2% to $23,435 in 2005 from $13,606 in 2004.  Our 2005 consolidated gross profit marginrate increased to 29.6% from 25.1% in 2004. The gross profit margin for Explosive Metalworking increased from 25.4%in 2004 to 29.8% in 2005 and the gross profit margin for AMK Welding increasedto 25.2% in 2005 from 20.5% in 2004.  Thegross margin improvements for both Explosive Metalworking and AMK Weldingrelate primarily to the sales increases discussed above and the resultant morefavorable absorption of fixed manufacturing overhead expenses.  The Explosive Metalworking gross marginincrease also reflects higher average prices in 2005, particularly with respectto our European operations.

*General and administrative expenses*
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| General &  administrative expenses |       | $          | 4,051      |       | $          | 3,335      |       | $              | 716        |   | 21.5 | % |
| Percentage of net sales                |       | 5.1        | %          | 6.2        | %          |       |       |           |       |
|                                        |            |            |            |            |            |            |            |                |            |  |  |  |

 

General andadministrative expenses increased by $716, or 21.5%, to $4,051 in 2005 from$3,335 in 2004.  This increase in generaland administrative expenses reflects an aggregate increase of $310 in audit,tax consulting and investor relations expenses, a $336 increase in accruedincentive compensation expense, and the impact of annual salaryadjustments.  The 2005 increases inaudit, tax advisory, consulting and investor relations expenses relatesprimarily to compliance with the Sarbanes-Oxley Act of 2002, tax planninginitiatives and increased investor relations activities.  As a percentage of net sales, general andadministrative expenses decreased to 5.1% in 2005 from 6.2% in 2004.  This decreased percentage is attributable tothe significant increase in 2005 net sales.

26

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*Sellingexpenses*
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Selling Expense         |       | $          | 3,616      |       | $          | 3,383      |       | $              | 233        |   | 6.9 | % |
| Percentage of Net Sales |       | 4.6        | %          | 6.2        | %          |       |       |           |       |
|                         |            |            |            |            |            |            |            |                |            |  |  |  |

 

Selling expenses increasedby 6.9% to $3,616 in 2005 from $3,383 in 2004. The $233 increase in selling expenses reflects an increase in outsidesales commissions paid to third party agents that represent DMC in certaincountries, and is attributable to the 2005 sales increase.  As a result of the significant increase in2005 net sales, selling expenses as a percentage of net sales decreased to 4.6%in 2005 from 6.2% in 2004.

*Incomefrom operations of continuing operations*
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                       | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income from  operations of continuing operations |       | $          | 15,768     |       | $          | 6,888      |       | $              | 8,880      |   | 128.9 | % |
|                                                  |            |            |            |            |            |            |            |                |            |  |  |  |

 

Income fromoperations increased by 128.9% to $15,768 in 2005 from $6,888 in 2004.  Explosive Metalworking reported income fromoperations of $15,160 in 2005 as compared to $6,609 in 2004.  This 129.4% increase is largely attributableto the 47.1% sales increase discussed above.

AMKWelding reported income from operations of $608 in 2005, an increase of 117.9%from the $279 that it reported in 2004, which increase follows the 32.9% salesincrease.

*Interest expense, net*
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Interest  expense, net |       | $          | 156        |       | $          | 531        |       | $              | (375       | ) | (70.6 | )% |
|                        |            |            |            |            |            |            |            |                |            |  |  |  |

 

Net interest expensedecreased by 70.6% to $156 in 2005 from $531 in 2004.  This decrease in net interest expensereflects a significant decrease in average outstanding borrowings during 2005that resulted from the pay down of bank line of credit borrowings and SNPE’sconversion of a $1,200 convertible subordinated note into our common stock.

*Incometax provision*
| ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|-----------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **            | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Income Tax  Provision |       | $          | 5,233      |       | $          | 1,961      |       | $              | 3,272      |   | 166.9 | % |
| Effective Tax Rate    |       | 33.5       | %          | 30.8       | %          |       |       |           |       |
|                       |            |            |            |            |            |            |            |                |            |  |  |  |

 

We recorded an income taxprovision of $5,233 in 2005 compared to $1,961 in 2004.  The effective tax rate increased to 33.5% in2005 from 30.8% in 2004.  The 2005 and2004 income tax provisions include $3,514 and $1,663, respectively, related toU.S. taxes, with the remainder relating to foreign taxes associated with theoperations of Nobelclad and its Swedish subsidiary, Nitro Metall.

*Loss fromdiscontinued operations*
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change**     | ** ** |
| Loss from  discontinued operations |       | $          | —     |       | $          | 1,570      |       | $              | (1570      | ) | NA |   |
|                                    |            |            |            |            |            |            |            |                |            |  |  |  |

 

Wecompleted the divestiture of our Spin Forge division in September 2004.  Under the principal divestiture agreement, wesold the assets of the Spin Forge division to a third party, excluding certainequipment and real estate which were leased or subleased to the buyer, for asales price of approximately $1,665 to be paid in cash according to thearrangement set forth in the divestiture agreement.  With respect to the Spin Forge manufacturingequipment and tooling, we recorded an after tax impairment loss of $619 basedupon the difference between the carrying value of the equipment 

27

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and the present value ofthe future minimum equipment lease payments from the lessee plus estimatedliquidation proceeds at the end of the minimum lease term.  The 2004 loss from discontinued operations of$1,570 includes a net of tax loss of $787 from the Spin Forge divestiture,which reflects the asset impairment loss discussed above plus divestituretransaction costs, and the net of tax operating loss of $783 that Spin Forgereported from January 1 through September 17, 2004.  As discussed above, we sold the majority ofthe leased assets to the lessee and liquidated the remaining equipment inDecember 2006.  A pre-tax gain of $228was reported on these transactions in 2006.

Weheld a purchase option on the Spin Forge real estate that allowed us topurchase the real estate for $2,880, a price that was below the real estate’sappraised value.  The value inherent inthe real estate purchase option was believed to be significant but was notconsidered in the calculation of the above reported impairment loss on the SpinForge equipment and tooling due to uncertainties surrounding its ultimaterealization.  As discussed above, wecompleted the sale of the purchase option on the Spin Forge real estate onJanuary 10, 2006.

# **LIQUIDITY AND CAPITAL RESOURCES**

We havehistorically financed our operations from a combination of internally generatedcash flow, revolving credit borrowings, various long-term debt arrangements andthe issuance of common stock.  We believethat cash flow from operations and funds available under our current creditfacilities and any future replacement thereof will be sufficient to fund theworking capital, debt service and capital expenditure requirements of ourcurrent business operations for the foreseeable future.  Nevertheless, our ability to generatesufficient cash flows from operations will depend upon our success in executingour strategies, including our ability to secure new customer orders at ouroperating divisions, and to continue to implement cost-effective internalprocesses.

*Debt andother contractual obligations and commitments*

Any restriction on the availability of borrowing under our creditfacilities could negatively affect our ability to meet future cashrequirements. Our existing loan agreements include various covenants andrestrictions, certain of which relate to the payment of dividends or otherdistributions to stockholders, redemption of capital stock, incurrence ofadditional indebtedness, mortgaging, pledging or disposition of major assetsand maintenance of specified financial ratios. As of December 31, 2006, we were in compliance with all financialcovenants and other provisions of our debt agreements.

The table belowpresents principal cash flows by expected maturity dates for our debtobligations and other contractual obligations and commitments as of December31, 2006:
| ** **                      | ** ** | **Payment Due by Period**        | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **As of December 31, 2006** | ** ** |
| ** **                      | ** ** | **Less than**                              | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **1 Year**                                 | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** | **Total** | ** ** |
| Term Loan with French bank      |       | $                                               | 382        |   | $ | 382 |   | $ | — |   | $ | — |   | $ | 764 |   |
|                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Total debt  obligations *       |       | 382                                             |       | 382 |   | — |   | — |   | 764 |   |
|                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Operating lease  obligations ** |       | 342                                             |       | 614 |   | 253 |   | 109 |   | 1,318 |   |
|                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Purchase  obligations **        |       | 20,895                                          |       | — |   | — |   | — |   | 20,895 |   |
|                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Total                           |       | $                                               | 21,619     |   | $ | 996 |   | $ | 253 |   | $ | 109 |   | $ | 22,977 |   |

----

*                 Reflected inaccompanying consolidated balance sheets. Expected interest payments on the above debt obligations are notexpected to be significant for the years presented.

**          Not reflected inaccompanying consolidated balance sheets.

28

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For moreinformation about our debt obligations, refer to Note 3 to our consolidatedfinancial statements elsewhere in this annual report.

*Cashflows from operating activities*

Net cash flowsprovided by operating activities for 2006 totaled $16,557.  Significant sources of operating cash flowincluded net income of $20,764, non-cash depreciation and amortization expenseof $1,419, $2,115 from provision for deferred income taxes and stock-basedcompensation of $660.  Negative netchanges in working capital of $6,904 partly offset these sources of operatingcash flows.  Negative cash flows fromchanges in working capital included increases in restricted cash, accountsreceivable, inventories, and prepaid expenses and other of $3,059, $5,046, $6,424and $459, respectively, partly offset by increases in accounts payable andaccrued expenses and other liabilities of $5,509 and $2,483, respectively.

Net cash flowsprovided by operating activities for 2005 totaled $11,638.  Significant sources of operating cash flowincluded net income of $10,372, non-cash depreciation and amortization expenseof $1,568, and $3,728 from the tax benefit related to stock options exercisedduring the year.  These sources of operatingcash flow were partially offset by a deferred income tax benefit of $1,431 andnegative net changes in various components of working capital in the amount of$2,599.  Net negative changes in workingcapital included an increase in accounts receivable, inventories, and prepaidexpenses and other of $2,657, $4,486 and $327, respectively.  These negative changes in working capitalwere partially offset by an increase in accounts payable, customer advances,and accrued expenses and other liabilities of $1,733, $999 and $2,139respectively.

Net cash flowsprovided by operating activities for 2004 totaled $3,110, which consisted ofnet cash flows from continuing operations of $4,544 that was partially offsetby net cash flows used in discontinued operations of $1,434.  Significant sources of operating cash flowfrom continuing operations included income from continuing operations of$4,403, non-cash depreciation and amortization expense of $1,466, a provisionfor deferred income taxes of $1,181, and $311 from the tax benefit related tostock options exercised during the year. These sources of operating cash flow were partially offset by negativenet changes in various components of working capital in the amount of$2,817.   Negative net changes in workingcapital included increases in accounts receivable and inventories of $6,963 and$1,993, respectively.  These negativechanges in working capital were partially offset by increases in accountspayable, customer advances, andaccrued expenses and other liabilities of$3,126, $1,101 and $1,274 respectively, and a decrease in prepaid expenses andother of $638.  The large increases inaccounts receivable and inventories reflect the higher production and salesvolume associated with the strong performance of the Explosive Metalworkingbusiness during the last half of 2004. We were able to finance a significantportion of the build-up in accounts receivable and inventories by increasingaccounts payable and accrued expenses.

*Cashflows from investing activities*

Net cash flowsused in investing activities for 2006 totaled $2,745 and consisted primarily of$8,650 in capital expenditures that were partly offset by $1,950 from the saleof marketable securities and $3,665 in cash provided by discontinued operationsthat related to proceeds from  the saleof the Spin Forge real estate purchase option and the sale of the Spin Forgeleased assets.

Net cash flowsused in investing activities for 2005 totaled $3,494 and consisted primarily of$2,848 in capital expenditures and $1,950 for investment in marketable securitiesthat were partially offset by a $1,016 payment received on a portion of theoutstanding receivable relating to the Spin Forge divestiture.

Net cash flowsused in investing activities for 2004 totaled $419 and consisted primarily of$1,138 in capital expenditures that was partially offset by a $580 reduction inthe promissory note receivable relating to the 2003 sale of the PMP Division,the release of $190 in restricted cash from bond proceeds and investingactivities of discontinued operations of $45.

29

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*Cashflows from financing activities*

Net cash flowsused in financing activities for 2006 totaled $2,178.  Significant uses of cash for financingactivities included payment of annual dividends of $1,766, a $364 principalpayment on a term loan with French bank, and final principal payments on theindustrial development revenue bond in the amount of $1,720, including $1,630that was redeemed in advance of scheduled maturity dates.  Sources of cash flow from financing activitiesincluded $585 in net proceeds from the issuance of common stock relating to theexercise of stock options and $1,154 for tax benefits related to stock optionexercises.

Net cash flowsused in financing activities for 2005 totaled $4,662.  Significant uses of cash for financingactivities included net repayments on bank lines of credit if $3,216, paymentof annual dividends of $1,155, final principal payments on the SNPE term loanof $667, industrial development revenue bond principal payments of $790, and anannual principal payment of $361 on a term loan with a French bank.  Sources of cash flow from financingactivities included $1,555 in net proceeds from the issuance of common stockrelating to the exercise of stock options and employee stock purchases underour employee stock purchase plan.

Net cash flowsused in financing activities for 2004 totaled $897.  Significant uses of cash for financingactivities included related party debt repayments of $1,333 to SNPE, industrialdevelopment revenue bond principal payments of $1,120, related party lines ofcredit repayment of $624 to Groupe SNPE, and an annual principal payment on ourterm loan with a French bank of $360. These payments were partially offset by a net increase of $1,915 in banklines of credit borrowings and $889 in net proceeds from the issuance of commonstock relating to the exercise of stock options and employee stock purchasesunder our employee stock purchase plan.

**Critical Accounting Policies**

Our historicalconsolidated financial statements and notes to our historical consolidatedfinancial statements contain information that is pertinent to our management’sdiscussion and analysis of financial condition and results of operations.Preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires that our management makeestimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities. However, the accounting principles used by us generallydo not change our reported cash flows or liquidity. Interpretation of theexisting rules must be done and judgments made on how the specifics of a givenrule apply to us.

In management’sopinion, the more significant reporting areas impacted by management’sjudgments and estimates are revenue recognition, asset impairments, inventoryvaluation and impact of foreign currency exchange rate risks. Management’sjudgments and estimates in these areas are based on information available fromboth internal and external sources, and actual results could differ from theestimates, as additional information becomes known.  We believe the following to be our mostcritical accounting policies.

*Revenuerecognition*

Sales of cladmetal products and welding services are generally based upon customerspecifications set forth in customer purchase orders and require us to providecertifications relative to metals used, services performed and the results ofany non-destructive testing that the customer has requested be performed.  All issues of conformity of the product tospecifications are resolved before the product is shipped and billed.  Revenue is recognized only when all four ofthe following criteria have been satisfied: persuasive evidence of anarrangement exists; the price is fixed or determinable; delivery has occurred;and collection is reasonably assured. For contracts that require multiple shipments, revenue is recorded onlyfor the units included in each individual shipment.  If, as a contract proceeds toward completion,projected total cost on an individual contract indicates a potential loss, weprovide currently for such anticipated loss.

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*Assetimpairments*

We review ourlong-lived assets and held and used by us for impairment whenever events orchanges in circumstances indicate their carrying amount may not be recoverable.In so doing, we estimate the future net cash flows expected to result from theuse of the asset and its eventual disposition. If the sum of the expected futurenet cash flows (undiscounted and without interest charges) is less than thecarrying amount of the asset, an impairment loss is recognized to reduce theasset to its estimated fair value. Otherwise, an impairment loss is notrecognized.  Long-lived assets to bedisposed of, if any, are reported at the lower of carrying amount or fair valueless cost to sell.

*Goodwill*

Goodwill is testedfor impairment at least annually on reporting units one level below the segmentlevel and any impairment is based on the reporting unit’s estimated fairvalue.  Fair value can be determinedbased on discounted cash flows, comparable sales or valuations of similarbusinesses.  Impairment occurs when thecarrying amount of goodwill exceeds its estimated fair value.  Our policy is to test goodwill for impairmentin the fourth quarter of each year unless an indicator of impairment arisesearlier.

The entire amountof goodwill, which had a carrying value of $847 on our balance sheet as ofDecember 31, 2006, relates to our  ExplosivesMetalworking segment.  Based on theanalysis performed in the fourth quarter of 2006, no impairment was recorded tothe carrying value of goodwill.

*Impact offoreign currency exchange rate risks*

The functionalcurrency for our foreign operations is the applicable local currency for eachaffiliate company. Assets and liabilities of foreign subsidiaries for which thefunctional currency is the local currency are translated at exchange rates ineffect at period-end, and the statements of operations are translated at theaverage exchange rates during the period. Exchange rate fluctuations on translating foreign currency financialstatements into U.S. dollars that result in unrealized gains or losses arereferred to as translation adjustments. Cumulative translation adjustments arerecorded as a separate component of stockholders’ equity and are included inother cumulative comprehensive income (loss). Transactions denominated incurrencies other than the local currency are recorded based on exchange rates atthe time such transactions arise. Subsequent changes in exchange rates resultin transaction gains and losses, which are reflected in income as unrealized(based on period-end translations) or realized upon settlement of thetransactions. Cash flows from our operations in foreign countries aretranslated at actual exchange rates when known, or at the average rate for theperiod. As a result, amounts related to assets and liabilities reported in theconsolidated statements of cash flows will not agree to changes in thecorresponding balances in the consolidated balance sheets. The effects ofexchange rate changes on cash balances held in foreign currencies are reportedas a separate line item below cash flows from financing activities.

*Incometaxes*

We account forincome taxes in accordance with Statement of Financial Accounting StandardsNo.  109, Accounting for Income Taxes (“SFAS109”), which requires the recognition of deferred tax assets and deferred taxliabilities for the expected future income tax consequences of transactionsthat have been included in our financial statements but not our taxreturns.  Deferred tax assets andliabilities are determined based on the temporary differences between theConsolidated Financial Statement basis and the tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse.  Weroutinely evaluate deferred tax assets to determine if they will more likelythan not be recovered from future projected taxable income and, if not, werecord an appropriate valuation allowance.

During 2005, wecompleted an analysis of prior year tax credits and related items.  As a result of the analysis, we filed amendedfederal and state income tax returns. The amended state returns reported additional net operating losses andcredits above the amounts we had previously recorded in our books andrecords.  In assessing these additionallosses and credits, we determined that the utilization of a portion of thesedid not meet the more likely than not criteria, due to potential changes in thestates in which we have income tax nexus. Thus, we recorded a net valuation allowance 

31

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of approximately $177against the deferred tax assets during 2005. As of December 31, 2006, the balance of this allowance is $175.

*Stock-BasedCompensation Expense*

We account forstock-based compensation in accordance with the provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS123R”).  Under the fair value recognitionprovisions of SFAS 123R, stock-based compensation cost is estimated at thegrant date based on the value of the award and is recognized as expense ratablyover the requisite service period of the award. Determining the appropriate fair value model and calculating the fairvalue of stock options at the grant date requires judgment, includingestimating stock price volatility, forfeiture rates and expected option life.

**OffBalance Sheet Arrangements**

We have no obligations,assets or liabilities other than those appearing or disclosed in our financialstatements forming part of this annual report; no trading activities involvingnon-exchange traded contracts accounted for at fair value; and no relationshipsand transactions with persons or entities that derive benefits from theirnon-independent relationship with us or our related parties.

**Forward-Looking Statements**

This annual report and the documents incorporated by reference into itcontain certain forward-looking statements within the safe harbor provisions ofthe Private Securities Litigations Reform Act of 1995.  These statements include information withrespect to our financial condition and its results of operations andbusinesses.  Words such as “anticipates,”“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,”“continue,” “project” and similar expressions, as well as statements in thefuture tense, identify forward-looking statements.

These forward-looking statements are not guarantees of our future performanceand are subject to risks and uncertainties that could cause actual results todiffer materially from the results contemplated by the forward-lookingstatements.  These risks anduncertainties include:

·                  The ability to obtain new contracts atattractive prices;

·                  The size and timing of customer orders;

·                  Fluctuations in customer demand;

·                  Competitive factors;

·                  The timely completion of contracts;

·                  The timing and size of expenditures;

·                  The timely receipt of government approvalsand permits;

·                  The adequacy of local labor supplies at ourfacilities;

·                  The availability and cost of funds; and

·                  General economic conditions, bothdomestically and abroad.

The effects of these factorsare difficult to predict.  New factorsemerge from time to time and we cannot assess the potential impact of any suchfactor on the business or the extent to which any factor, or combination offactors, may cause results to differmaterially from those contained in any forward-looking statement.  Any forward-looking statement 

32

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speaksonly as of the date of this annual report and we do not undertake anyobligation to update any forward-looking statement to reflect events or circumstances after the date of suchstatement or to reflect the occurrenceof unanticipated events.  In addition,see “Risk Factors” for a discussion of these and other factors**.**

**Recent Accounting Pronouncements**

In July 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB No. 109* (“FIN 48”), whichclarifies the accounting and disclosure for uncertainty in tax positions.  FIN 48 seeks to harmonize certain accountingpractices associated with the recognition and measurement of income taxes.  This interpretation is effective for fiscalyears beginning after December 15, 2006. The Company has not yet determined the impact this interpretation willhave on its results from operations or financial position.

**ITEM 7A.               Quantitativeand Qualitative Disclosure about Market Risk**

The table belowprovides information about our financial instruments that are sensitive tochanges in interest rates, primarily debt obligations. Since most of ourobligations carry variable interest rates, there is no material differencebetween the book value and the fair value of those obligations.

|                                                  | ** ** | **As of December 31,  2006** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **(Dollars in Thousands)**        | ** ** |
|                                             |       |                                        |       |
| Term-loan with  French bank — variable rate |       | $                                           | 765        |   |
| Interest rate                                    |       | 4.02                                        | %          |
|                                                  |            |                                             |            |  |

 

The functional currencies for the foreign operationsof Nobelclad and Nitro Metall are the Euro and the Swedish Krona, respectively.Thus, the major foreign exchange risks relate to the Euro / Swedish Krona andEuro / U.S. Dollar conversion rates. Additionally, we occasionally enter intotransactions denominated in currencies other than the local currency, whichexposes us to other foreign exchange risks. Sales made in currencies other than U.S. Dollars accounted for 34%, 32%and 30% of total sales for the years ended 2006, 2005 and 2004, respectively.

33

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**ITEM 8.  Financial Statements and Supplementary Data**

**DYNAMIC MATERIALS CORPORATION AND SUBSIDIARY**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

**As of December 31, 2006 and 2005and for the Three Years Ended****December 31, 2006, 2005 and 2004**
|                                                          | ** ** |
|----------------------------------------------------------|------------|
| Report of Independent  Registered Public Accounting Firm |       |
| Financial  Statements:                                   |       |
| Consolidated  Balance Sheets                             |       |
| Consolidated  Statements of Operations                   |       |
| Consolidated  Statements of Stockholders’ Equity    |       |
| Consolidated  Statements of Cash Flows                   |       |
| Notes to Consolidated Financial Statements               |       |

 

The consolidatedfinancial statement schedules required by Regulation S-X are filed under Item 15“Exhibits and Financial Statement Schedules”.

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**Report ofIndependent Registered Public Accounting Firm**

TheStockholders and the

Board of Directors of Dynamic MaterialsCorporation:

We have audited the accompanying consolidated balancesheets of Dynamic Materials Corporation and subsidiary as of December 31, 2006and 2005, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period ended December31, 2006. These consolidated financial statements are the responsibility ofDynamic Materials Corporation’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade my management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Dynamic Materials Corporation and subsidiary at December31, 2006 and 2005, and the consolidated results of their operations and theircash flows for each of the three years in the period ended December 31, 2006,in conformity with U.S. generally accepted accounting principles.

As discussed in Note 4 to the consolidated financialstatements, effective January 1, 2006, Dynamic Materials Corporation changedits method for stock-based compensation in accordance with Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment”.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Dynamic Materials Corporation’s internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 6, 2007 expressed an unqualified opinion thereon.
|                  | /s/ ERNST & YOUNG LLP |   |
|------------------|---------------------------|--------|
|             |                      |
| Denver, Colorado |                      |
| March 6, 2007    |                      |

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

AS OF DECEMBER 31, 2006AND 2005

(Dollars inThousands)
| ASSETS                                                                                       |   | **2006** | ** ** | **2005** |   |
|----------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| CURRENT ASSETS:                                                                              |   |     |       |     |   |
| Cash and cash  equivalents                                                                   |   | $        | 17,886     |     | $      | 5,763 |   |
| Restricted cash                                                                              |   | 3,059    |       | —   |   |
| Marketable  securities                                                                       |   | —   |       | 1,950    |   |
| Accounts  receivable, net of allowance for doubtful accounts of $260 and $301,  respectively |   | 21,549   |       | 15,576   |   |
| Inventories                                                                                  |   | 19,226   |       | 11,869   |   |
| Prepaid expenses  and other                                                                  |   | 1,419    |       | 822      |   |
| Current deferred  tax assets                                                                 |   | 708      |       | 572      |   |
|                                                                                         |   |     |       |     |   |
| Total current  assets                                                                        |   | 63,847   |       | 36,552   |   |
|                                                                                         |   |     |       |     |   |
| PROPERTY, PLANT AND  EQUIPMENT                                                               |   | 31,963   |       | 22,635   |   |
| Less -  Accumulated depreciation                                                             |   | (11,703  | )          | (10,063  | )      |
|                                                                                         |   |     |       |     |   |
| Property, plant  and equipment, net                                                          |   | 20,260   |       | 12,572   |   |
|                                                                                         |   |     |       |     |   |
| GOODWILL, net                                                                                |   | 847      |       | 847      |   |
|                                                                                         |   |     |       |     |   |
| DEFERRED TAX ASSETS                                                                          |   | —   |       | 819      |   |
|                                                                                         |   |     |       |     |   |
| OTHER ASSETS, net                                                                            |   | 19       |       | 101      |   |
|                                                                                         |   |     |       |     |   |
| OTHER RECEIVABLES  RELATED TO DISCONTINUED OPERATIONS                                        |   | —   |       | 681      |   |
|                                                                                         |   |     |       |     |   |
| ASSETS OF DISCONTINUED  OPERATIONS                                                           |   | —   |       | 3,739    |   |
|                                                                                         |   |     |       |     |   |
| TOTAL ASSETS                                                                                 |   | $        | 84,973     |     | $      | 55,311 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

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| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                           |   | **2006** | ** ** | **2005** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| CURRENT LIABILITIES:                                                                                                               |   |     |       |     |   |
| Accounts payable                                                                                                                   |   | $        | 13,572     |     | $      | 7,278 |   |
| Accrued expenses                                                                                                                   |   | 3,347    |       | 1,615    |   |
| Accrued income  taxes                                                                                                              |   | 1,892    |       | 979      |   |
| Accrued employee  compensation and benefits                                                                                        |   | 3,710    |       | 2,508    |   |
| Customer  advances                                                                                                                 |   | 2,394    |       | 1,885    |   |
| Related party  debt                                                                                                                |   | —   |       | 45       |   |
| Current  maturities on long-term debt                                                                                              |   | 382      |       | 528      |   |
|                                                                                                                               |   |     |       |     |   |
| Total current  liabilities                                                                                                         |   | 25,297   |       | 14,838   |   |
|                                                                                                                               |   |     |       |     |   |
| LONG-TERM DEBT                                                                                                                     |   | 382      |       | 2,221    |   |
|                                                                                                                               |   |     |       |     |   |
| DEFERRED TAX  LIABILITIES                                                                                                          |   | 1,512    |       | 195      |   |
|                                                                                                                               |   |     |       |     |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                       |   | 202      |       | 222      |   |
|                                                                                                                               |   |     |       |     |   |
| LIABILITIES OF  DISCONTINUED OPERATIONS                                                                                            |   | —   |       | 2,880    |   |
|                                                                                                                               |   |     |       |     |   |
| COMMITMENTS AND  CONTINGENT LIABILITIES                                                                                            |   | —   |       | —   |   |
|                                                                                                                               |   |     |       |     |   |
| Total  liabilities                                                                                                                 |   | 27,393   |       | 20,356   |   |
|                                                                                                                               |   |     |       |     |   |
| STOCKHOLDERS’ EQUITY:                                                                                                         |   |     |       |     |   |
| Preferred stock,  $.05 par value; 4,000,000 shares authorized; no issued and outstanding shares                                    |   | —   |       | —   |   |
| Common stock,  $.05 par value; 15,000,000 shares authorized;11,981,999 and 11,758,920 shares  issued and outstanding, respectively |   | 599      |       | 588      |   |
| Additional  paid-in capital                                                                                                        |   | 22,166   |       | 19,778   |   |
| Retained  earnings                                                                                                                 |   | 33,102   |       | 14,104   |   |
| Other cumulative  comprehensive income                                                                                             |   | 1,713    |       | 485      |   |
|                                                                                                                               |   |     |       |     |   |
| Total  stockholders’ equity                                                                                                   |   | 57,580   |       | 34,955   |   |
|                                                                                                                               |   |     |       |     |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                   |   | $        | 84,973     |     | $      | 55,311 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

37

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DYNAMICMATERIALS CORPORATION & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FORTHE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

(Dollars in Thousands, Except Share Data)
| ** **                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| NET SALES                                               |       | $          | 113,472    |       | $          | 79,291     |       | $ | 54,165 |   |
|                                                    |       |       |       |       |       |       |       |
| COST OF PRODUCTS SOLD                                   |       | 71,439     |       | 55,856     |       | 40,559     |       |
| Gross profit                                            |       | 42,033     |       | 23,435     |       | 13,606     |       |
|                                                    |       |       |       |       |       |       |       |
| COSTS AND EXPENSES:                                     |       |       |       |       |       |       |       |
| General and  administrative expenses                    |       | 5,802      |       | 4,051      |       | 3,335      |       |
| Selling expenses                                        |       | 6,128      |       | 3,616      |       | 3,383      |       |
|                                                    |       |       |       |       |       |       |       |
| Total costs and  expenses                               |       | 11,930     |       | 7,667      |       | 6,718      |       |
|                                                    |       |       |       |       |       |       |       |
| INCOME FROM OPERATIONS  OF CONTINUING OPERATIONS        |       | 30,103     |       | 15,768     |       | 6,888      |       |
|                                                    |       |       |       |       |       |       |       |
| OTHER INCOME (EXPENSE):                                 |       |       |       |       |       |       |       |
| Other income  (expense), net                            |       | (115       | )          | (7         | )          | 7          |       |
| Interest expense                                        |       | (84        | )          | (171       | )          | (408       | )          |
| Related party  interest expense                         |       | —     |       | (48        | )          | (146       | )          |
| Interest income                                         |       | 704        |       | 63         |       | 23         |       |
|                                                    |       |       |       |       |       |       |       |
| INCOME BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS |       | 30,608     |       | 15,605     |       | 6,364      |       |
|                                                    |       |       |       |       |       |       |       |
| INCOME TAX PROVISION                                    |       | 11,341     |       | 5,233      |       | 1,961      |       |
|                                                    |       |       |       |       |       |       |       |
| INCOME FROM CONTINUING  OPERATIONS                      |       | 19,267     |       | 10,372     |       | 4,403      |       |
|                                                    |       |       |       |       |       |       |       |
| INCOME (LOSS) FROM  DISCONTINUED OPERATIONS, net of tax |       | 1,497      |       | —     |       | (1,570     | )          |
|                                                    |       |       |       |       |       |       |       |
| NET INCOME                                              |       | $          | 20,764     |       | $          | 10,372     |       | $ | 2,833 |   |
|                                                    |       |       |       |       |       |       |       |
| INCOME PER SHARE -  BASIC:                              |       |       |       |       |       |       |       |
| Continuing  operations                                  |       | $          | 1.63       |       | $          | 0.92       |       | $ | 0.43 |   |
| Discontinued  operations                                |       | 0.12       |       | —     |       | (0.15      | )          |
|                                                    |       |       |       |       |       |       |       |
| Net income                                              |       | $          | 1.75       |       | $          | 0.92       |       | $ | 0.28 |   |
|                                                    |       |       |       |       |       |       |       |
| INCOME PER SHARE -  DILUTED:                            |       |       |       |       |       |       |       |
| Continuing  operations                                  |       | $          | 1.58       |       | $          | 0.86       |       | $ | 0.41 |   |
| Discontinued  operations                                |       | 0.12       |       | —     |       | (0.14      | )          |
|                                                    |       |       |       |       |       |       |       |
| Net income                                              |       | $          | 1.70       |       | $          | 0.86       |       | $ | 0.27 |   |
|                                                    |       |       |       |       |       |       |       |
| WEIGHTED AVERAGE NUMBER  OF SHARES OUTSTANDING -        |       |       |       |       |       |       |       |
| Basic                                                   |       | 11,841,373 |       | 11,290,053 |       | 10,269,080 |       |
| Diluted                                                 |       | 12,213,075 |       | 12,086,884 |       | 10,968,090 |       |
|                                                    |       |       |       |       |       |       |       |
| ANNUAL DIVIDENDS DECLARED PER COMMON SHARE              |       | $          | 0.15       |       | $          | 0.10       |       | $ | — |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements

38

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDEDDECEMBER 31, 2006, 2005 AND 2004

(Amounts inThousands)
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Other**      | ** ** | ** ** | ** ** | ** **                   | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|------------------------------|------------|
| ** **                                                         | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Cumulative** | ** ** | ** ** | ** ** | **Comprehensive**            | ** ** |
| ** **                                                         | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **     | ** ** | **Income** | ** ** |
| ** **                                                         | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**     | ** ** | **Total**  | ** ** | **for the Period** | ** ** |
| Balances, December 31, 2003                                        |       | 10,178                |       | $           | 509        |           | $          | 12,174            |       | $              | 2,054      |       | $          | 847                          |       | $ | 15,584 |   |   |   |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued for stock  option exercises                          |       | 424                   |       | 21          |       | 815            |       | —            |       | —         |       | 836        |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued in  connection with the employee stock purchase plan |       | 39                    |       | 2           |       | 51             |       | —            |       | —         |       | 53         |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Tax benefit related to  stock options                              |       | —                |       | —      |       | 311            |       | —            |       | —         |       | 311        |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Net income                                                         |       | —                |       | —      |       | —         |       | 2,833             |       | —         |       | 2,833      |       | 2,833                        |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Derivative valuation,  net of tax of $27                           |       | —                |       | —      |       | —         |       | —            |       | 43             |       | 43         |       | 43                           |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Change in cumulative  foreign currency translation adjustment      |       | —                |       | —      |       | —         |       | —            |       | 410            |       | 410        |       | 410                          |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Balances, December 31, 2004                                        |       | 10,641                |       | 532         |       | 13,351         |       | 4,887             |       | 1,300          |       | 20,070     |       | 3,286                        |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued for stock  option exercises                          |       | 707                   |       | 35          |       | 1,447          |       | —            |       | —         |       | 1,482      |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued in  connection with the employee stock purchase plan |       | 11                    |       | 1           |       | 72             |       | —            |       | —         |       | 73         |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Conversion of  subordinated note                                   |       | 400                   |       | 20          |       | 1,180          |       | —            |       | —         |       | 1,200      |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Tax benefit related to  stock options                              |       | —                |       | —      |       | 3,728          |       | —            |       | —         |       | 3,728      |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Dividends paid                                                     |       | —                |       | —      |       | —         |       | (1,155            | )          | —         |       | (1,155     | )          |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Net income                                                         |       | —                |       | —      |       | —         |       | 10,372            |       | —         |       | 10,372     |       | 10,372                       |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Change in cumulative  foreign currency translation adjustment      |       | —                |       | —      |       | —         |       | —            |       | (815           | )          | (815       | )          | (815                         | )          |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Balances, December 31, 2005                                        |       | 11,759                |       | 588         |       | 19,778         |       | 14,104            |       | 485            |       | 34,955     |       | 9,557                        |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Shares issued for stock  option exercises                          |       | 168                   |       | 8           |       | 492            |       | —            |       | —         |       | 500        |       |                         |       |
| Restricted stock awards                                            |       | 52                    |       | 3           |       | (3             | )          | —            |       | —         |       | —     |       |                         |       |
| Shares issued in  connection with the employee stock purchase plan |       | 3                     |       | —      |       | 85             |       | —            |       | —         |       | 85         |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Tax benefit related to  stock options                              |       | —                |       | —      |       | 1,154          |       | —            |       | —         |       | 1,154      |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Stock-based compensation                                           |       | —                |       | —      |       | 660            |       | —            |       | —         |       | 660        |       |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Dividends paid                                                     |       | —                |       | —      |       | —         |       | (1,766            | )          | —         |       | (1,766     | )          |                         |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Net income                                                         |       | —                |       | —      |       | —         |       | 20,764            |       | —         |       | 20,764     |       | 20,764                       |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Change in cumulative  foreign currency translation adjustment      |       | —                |       | —      |       | —         |       | —            |       | 1,228          |       | 1,228      |       | 1,228                        |       |
|                                                               |       |                  |       |        |       |           |       |              |       |           |       |       |       |                         |       |
| Balances,  December 31, 2006                                       |       | 11,982                |       | $           | 599        |           | $          | 22,166            |       | $              | 33,102     |       | $          | 1,713                        |       | $ | 57,580 |   | $ | 21,992 |   |
|                                                                    |            |                       |            |             |            |                |            |                   |            |                |            |            |            |                              |            |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these Consolidated Financial Statements.

39

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DYNAMIC MATERIALSCORPORATION & SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE YEARS ENDEDDECEMBER 31, 2006, 2005 AND 2004

(Dollars inThousands)
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                              |       |     |       |     |       |     |       |
| Net income                                                                          |       | $        | 20,764     |     | $          | 10,372   |       | $ | 2,833 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities - |       |     |       |     |       |     |       |
| (Income) loss  from discontinued operations, net of tax                             |       | (1,497   | )          | —   |       | 1,570    |       |
| Depreciation                                                                        |       | 1,369    |       | 1,527    |       | 1,387    |       |
| Amortization of  capitalized debt issuance costs                                    |       | 50       |       | 41       |       | 79       |       |
| Stock-based  compensation                                                           |       | 660      |       | —   |       | —   |       |
| Deferred income  tax provision (benefit)                                            |       | 2,115    |       | (1,431   | )          | 1,181    |       |
| Tax benefit  related to exercise of stock options                                   |       | —   |       | 3,728    |       | 311      |       |
| Change in -                                                                         |       |     |       |     |       |     |       |
| Restricted cash                                                                     |       | (3,059   | )          | —   |       | —   |       |
| Accounts  receivable, net                                                           |       | (5,046   | )          | (2,657   | )          | (6,963   | )          |
| Inventories                                                                         |       | (6,424   | )          | (4,486   | )          | (1,993   | )          |
| Prepaid expenses  and other                                                         |       | (459     | )          | (327     | )          | 638      |       |
| Accounts payable                                                                    |       | 5,509    |       | 1,733    |       | 3,126    |       |
| Customer  advances                                                                  |       | 92       |       | 999      |       | 1,101    |       |
| Accrued expenses  and other liabilities                                             |       | 2,483    |       | 2,139    |       | 1,274    |       |
|                                                                                |       |     |       |     |       |     |       |
| Net cash flows  provided by continuing operations                                   |       | 16,557   |       | 11,638   |       | 4,544    |       |
| Net cash flows  used in discontinued operations                                     |       | —   |       | —   |       | (1,434   | )          |
|                                                                                |       |     |       |     |       |     |       |
| Net cash  provided by operating activities                                          |       | 16,557   |       | 11,638   |       | 3,110    |       |
|                                                                                |       |     |       |     |       |     |       |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                              |       |     |       |     |       |     |       |
| Acquisition of  property, plant and equipment                                       |       | (8,650   | )          | (2,848   | )          | (1,138   | )          |
| Investment in  marketable securities                                                |       | —   |       | (1,950   | )          | —   |       |
| Sale of  marketable securities                                                      |       | 1,950    |       | —   |       | —   |       |
| Loan to related  party                                                              |       | (1,206   | )          | —   |       | —   |       |
| Repayment on  loan to related party                                                 |       | 1,206    |       | —   |       | —   |       |
| Release of  non-current restricted cash from bond proceeds                          |       | —   |       | —   |       | 190      |       |
| Change in other  non-current assets                                                 |       | 290      |       | 288      |       | (6       | )          |
| Payment received  on other receivables related to discontinued operations           |       | 576      |       | 1,016    |       | 580      |       |
| Cash flows provided  by (used in) investing activities of discontinued operations   |       | 3,089    |       | —   |       | (45      | )          |
|                                                                                |       |     |       |     |       |     |       |
| Net cash flows used in  investing activities                                        |       | (2,745   | )          | (3,494   | )          | (419     | )          |
|                                                                                     |            |          |            |          |            |          |            |  |  |  |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

40

----

 
| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                 |       |     |       |     |       |     |       |
| Borrowings /  (repayments) on bank lines of credit, net                |       | —   |       | (3,216   | )          | 1,915    |       |
| Repayments on  related party lines of credit, net                      |       | (48      | )          | (75      | )          | (624     | )          |
| Payment on SNPE,  Inc. term loan                                       |       | —   |       | (667     | )          | (1,333   | )          |
| Payment on  industrial development revenue bond                        |       | (1,720   | )          | (790     | )          | (1,120   | )          |
| Payment on term  loan with French bank                                 |       | (364     | )          | (361     | )          | (360     | )          |
| Repayment of  bank overdraft                                           |       | —   |       | —   |       | (288     | )          |
| Payment of  dividends                                                  |       | (1,766   | )          | (1,155   | )          | —   |       |
| Change in other  long-tem liabilities                                  |       | (19      | )          | 47       |       | 24       |       |
| Net proceeds  from issuance of common stock to employees and directors |       | 585      |       | 1,555    |       | 889      |       |
| Tax benefit  related to exercise of stock options                      |       | 1,154    |       | —   |       | —   |       |
|                                                                   |       |     |       |     |       |     |       |
| Net cash flows  used in financing activities                           |       | (2,178   | )          | (4,662   | )          | (897     | )          |
|                                                                   |       |     |       |     |       |     |       |
| EFFECTS OF EXCHANGE  RATES ON CASH                                     |       | 489      |       | (123     | )          | 88       |       |
|                                                                   |       |     |       |     |       |     |       |
| NET INCREASE IN CASH  AND CASH EQUIVALENTS                             |       | 12,123   |       | 3,359    |       | 1,882    |       |
|                                                                   |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, beginning of the period                    |       | 5,763    |       | 2,404    |       | 522      |       |
|                                                                   |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS, end of the period                          |       | $        | 17,886     |     | $          | 5,763    |       | $ | 2,404 |   |
|                                                                   |       |     |       |     |       |     |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                     |       |     |       |     |       |     |       |
| Cash paid during  the period for -                                     |       |     |       |     |       |     |       |
| Interest                                                               |       | $        | 118        |     | $          | 279      |       | $ | 422 |   |
| Income taxes                                                           |       | $        | 9,066      |     | $          | 2,502    |       | $ | 215 |   |
|                                                                   |       |     |       |     |       |     |       |
| NON-CASH FINANCING  ACTIVITY:                                          |       |     |       |     |       |     |       |
| Conversion of SNPE  convertible subordinated note into common stock    |       | $   | —     |     | $     | 1,200    |       | $  | — |   |

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements.

41

----

DYNAMIC MATERIALSCORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

(Dollars in Thousands, Except Per Share Data)

(1)           ORGANIZATION AND BUSINESS

DynamicMaterials Corporation (the “Company”) was incorporated in the state of Coloradoin 1971, and reincorporated in the state of Delaware during 1997, to provideproducts and services requiring explosive metalworking. The Company isheadquartered in Boulder, Colorado and has manufacturing facilities in theUnited States, France and Sweden. Customers are located throughout the world.The Company currently operates under two business segments — ExplosiveMetalworking, in which metals are metallurgically joined or altered by usingexplosives; and AMK Welding, which utilizes a number of welding technologies toweld components for manufacturers of jet engines and ground-based turbines. TheCompany’s wholly-owned subsidiary, Nobelclad Europe S.A. (“Nobelclad”), wasacquired during 2001 from an affiliate of the Company’s former parent.

StockSplit

OnSeptember 23, 2005, the Company announced that its Board of Directors approveda 2-for-1 split of the Company’s common stock. The split was effected as a stock dividend, and was paid to stockholdersof record as of the close of business on October 5, 2005.  Stockholders on the record date received oneadditional share of common stock for each share held.  The payment date was October 12, 2005.  All share and per share data in theconsolidated financial statements and notes have been adjusted and restated toreflect the stock split as if it had taken place at the beginning of eachperiod presented.

SNPE,Inc. Transactions

On June 14, 2000, theCompany’s stockholders approved a Stock Purchase Agreement (“the Agreement”)between the Company and SNPE, Inc. (“SNPE”), a wholly owned subsidiary of SNPES.A. (Groupe SNPE). The closing of thetransaction, which was held immediately following stockholder approval,resulted in a payment from SNPE of $5,800 to the Company in exchange for4,218,182 shares of the Company’s common stock at a price of $1.375 per sharecausing SNPE to become a 50.8% stockholder of the Company on the closingdate.  As of December 31, 2005, SNPEowned 5,926,982 shares or 50.4% of the Company’s common stock.  On May 15, 2006, in an underwrittenpublic offering, SNPE sold all of its shares of the Company’s commonstock.  Following the sale, four membersof the Company’s board of directors, each of whom had represented SNPE,resigned from the board.  All transactionexpenses were paid by SNPE.

(2)           SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

Principlesof Consolidation

The Consolidated Financial Statements include the accounts of theCompany and its wholly-owned subsidiary. All significant intercompany accounts, profits and transactions havebeen eliminated in consolidation.

42

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Use of Estimates

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from these estimates.

Foreign Operations and Foreign Exchange Rate Risk

The functional currency for the Company’s foreignoperations is the applicable local currency for each affiliate company. Assetsand liabilities of foreign subsidiaries for which the functional currency isthe local currency are translated at exchange rates in effect at period-end,and the statements of operations are translated at the average exchange ratesduring the period.  Exchange ratefluctuations on translating foreign currency financial statements into U.S.dollars that result in unrealized gains or losses are referred to astranslation adjustments. Cumulative translation adjustments are recorded as aseparate component of stockholders’ equity and are included in other cumulativecomprehensive income. Transactions denominated in currencies other than thelocal currency are recorded based on exchange rates at the time suchtransactions arise. Subsequent changes in exchange rates result in transactiongains and losses which are reflected in income as unrealized (based onperiod-end translations) or realized upon settlement of the transactions. Cashflows from the Company’s operations in foreign countries are translated atactual exchange rates when known, or at the average rate for the period. As a result,amounts related to assets and liabilities reported in the consolidatedstatements of cash flows will not agree to changes in the correspondingbalances in the consolidated balance sheets. The effects of exchange ratechanges on cash balances held in foreign currencies are reported as a separateline item below cash flows from financing activities.

Cash and Cash Equivalents and Restricted Cash

Forpurposes of the financial statements, the Company considers highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.

Restrictedcash relates to an advance payment received from a customer on a large contractthat was secured  through a bankguarantee arrangement between the customer, Nobelclad and Nobelclad’sbank.  Under the bank guarantee,Nobelclad’s bank holds the advance payment in a trust account until finalshipment of the related order and expiration of the  guarantee . The entire order associated with the restricted cash was shipped duringthe fourth quarter of 2006 and the bank guarantee expires in the first quarterof 2007, at which point the restriction on the cash lapses.

Marketablesecurities

Marketablesecurities were comprised entirely of investment grade variable rate debtobligations, which were asset backed and categorized as available forsale.  Accordingly, these investmentswere recorded at cost, which approximated fair value due to their variableinterest rates, which typically reset every 7 days.  The Company had the ability to quicklyliquidate these investments despite their long-term stated contractualmaturities.   As a result of the variableinterest rates, the Company had no cumulative gross unrealized or realizedholding gains or losses on these investments. All income generated from these securities was recorded as interestincome.

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Inventories

Inventoriesare stated at the lower-of-cost (first-in, first-out) or market value. Costelements included in inventory are material, labor, subcontract costs andfactory overhead.  Inventories consist ofthe following at December 31, 2006 and 2005:

 

|                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 6,282      |     | $          | 5,767 |   |
| Work-in-process |       | 12,314   |       | 5,878    |       |
| Supplies        |       | $        | 630        |     | 224        |   |
|            |       | 19,226   |       | $        | 11,869     |   |

 

Shippingand handling costs incurred by the Company upon shipment to customers areincluded in cost of products sold in the accompanying Consolidated Statementsof Operations.

Property, Plant and Equipment

Property,plant and equipment are recorded at cost. Additions, improvements andbetterments are capitalized. Maintenance and repairs are charged to operationsas the costs are incurred. Depreciation is computed using the straight-linemethod over the estimated useful life of the related asset (except leaseholdimprovements which are depreciated over the shorter of the estimated usefullife or the lease term) as follows:

 

| Building and improvements                   |   | 15-30 years |   |
|---------------------------------------------|--------|-------------|--------|
| Manufacturing  equipment and tooling        |   | 3-15 years  |   |
| Furniture,  fixtures and computer equipment |   | 3-10 years  |   |
| Other                                       |   | 7-10 years  |   |

 

Property, plant and equipment consist of the followingat December 31, 2006 and 2005:

 

|                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Land                                        |       | $        | 600        |     | $          | 570 |   |
| Building and  improvements                  |       | 8,707    |       | 8,032    |       |
| Manufacturing  equipment and tooling        |       | 12,210   |       | 10,901   |       |
| Furniture,  fixtures and computer equipment |       | 3,069    |       | 2,776    |       |
| Other                                       |       | 518      |       | 267      |       |
| Construction in  process                    |       | 6,859    |       | 89       |       |
|                                        |       | $        | 31,963     |     | $          | 22,635 |   |

 

Asset Impairments

TheCompany reviews its long-lived assets to be held and used by the Company forimpairment whenever events or changes in circumstances indicate their carryingamount may not be recoverable. In so doing, the Company estimates the futurenet cash flows expected to result from the use of the asset and its eventualdisposition. If the sum of the expected future net cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the asset, animpairment loss is recognized to reduce the asset to its estimated fair value.Otherwise, an impairment loss is not recognized. Long-lived assets to bedisposed of, if any, are reported at the lower of carrying amount or fair valueless cost to sell.

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Goodwill

Goodwill represents the excess of acquisition costs overthe fair value of net assets of businesses acquired.  Under Statement of Financial AccountingStandards No. 142, goodwill is no longer required to be amortized; however, thecarrying value of goodwill must be tested annually for impairment.   The Company’s policy is to test goodwill inthe fourth quarter of each year unless circumstances indicate an impairmentduring an intervening period.

Customer Advances

On occasion, the Company requires customers tomake advance payments prior to the shipment of the related orders in order tokeep customers at acceptable credit limit levels.   As of December 31, 2006 and 2005, customeradvances totaled $2,394 and $1,885, respectively, and consist of advancepayments from several customers.

Revenue Recognition

Sales of cladmetal products and welding services are generally based upon customer specificationsset forth in customer purchase orders and require us to provide certificationsrelative to metals used, services performed and the results of any non-destructive testing that the customer hasrequested be performed.   All issues ofconformity of the product to specifications are resolved before the product isshipped and billed.  Revenue isrecognized only when all four of the following criteria have been satisfied:persuasive evidence of an arrangement exists; the price is fixed or determinable;delivery has occurred; and collection is reasonably assured.  For contracts that require multipleshipments, revenue is recorded only for the units included in each individualshipment.  If, as a contract proceedstoward completion, projected total cost on an individual contract indicates apotential loss, we provide currently for such anticipated loss.

Net Income Per Share

Basicearnings per share (“EPS”) is computed by dividing net income by the weightedaverage number of shares of common stock outstanding during the period. DilutedEPS recognizes the potential dilutive effects of dilutive securities. Thefollowing represents a reconciliation of the numerator and denominator used inthe calculation of basic and diluted EPS:

 
| ** **                                           | ** ** | **For the year ended December 31, 2006** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                           | ** ** | **Income**                                                             | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share:                           |       |                                                                   |       |   |   |   |   |
| Net income                                           |       | $                                                                      | 20,764     |   | 11,841,373 |   | $ | 1.75 |   |
|                                                 |       |                                                                   |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock |       | —                                                                 |       | 371,408 |   |   |   |
| Dilutive effect  of restricted stock awards          |       | —                                                                 |       | 294 |   |   |   |
|                                                 |       |                                                                   |       |   |   |   |   |
| Dilutive  earnings per share:                        |       |                                                                   |       |   |   |   |   |
| Net income                                           |       | $                                                                      | 20,764     |   | 12,213,075 |   | $ | 1.70 |   |

 

45

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| ** **                                                    | ** ** | **For the year ended December 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Income**                                                             | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share:                                    |       |                                                                   |       |   |   |   |   |
| Net income                                                    |       | $                                                                      | 10,372     |   | 11,290,053 |   | $ | 0.92 |   |
|                                                          |       |                                                                   |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                                                 |       | 622,584 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | 23                                                                     |       | 174,247 |   |   |   |
|                                                          |       |                                                                   |       |   |   |   |   |
| Dilutive  earnings per share:                                 |       |                                                                   |       |   |   |   |   |
| Net income                                                    |       | $                                                                      | 10,395     |   | 12,086,884 |   | $ | 0.86 |   |

 

 
| ** **                                                    | ** ** | **For the year ended December 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Per share** | ** ** |
| ** **                                                    | ** ** | **Income**                                                             | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share:                                    |       |                                                                   |       |   |   |   |   |
| Net income                                                    |       | $                                                                      | 2,833      |   | 10,269,080 |   | $ | 0.28 |   |
|                                                          |       |                                                                   |       |   |   |   |   |
| Dilutive effect  of options to purchase common stock          |       | —                                                                 |       | 299,010 |   |   |   |
| Dilutive effect  of convertible subordinated note, net of tax |       | 50                                                                     |       | 400,000 |   |   |   |
|                                                          |       |                                                                   |       |   |   |   |   |
| Dilutive  earnings per share:                                 |       |                                                                   |       |   |   |   |   |
| Net income                                                    |       | $                                                                      | 2,883      |   | 10,968,090 |   | $ | 0.27 |   |

 

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FairValue of Financial Instruments

The carrying valueof cash and cash equivalents, marketable securities, trade accounts receivableand payable, accrued expenses and notes receivable are considered toapproximate fair value due to the short-term nature of these instruments. Thefair value of the Company’s long-term debt is estimated to approximate carryingvalue based on the borrowing rates currently available to the Company for bankloans with similar terms and average maturities.

Income Taxes

TheCompany recognizes deferred tax assets and liabilities for the expected futureincome tax consequences based on enacted tax laws of temporary differencesbetween the financial reporting and tax bases of assets and liabilities. TheCompany recognizes deferred tax assets for the expected future effects of alldeductible temporary differences. Deferred tax assets are then reduced, ifdeemed necessary, by a valuation allowance for the amount of any tax benefitswhich, more likely than not based on current circumstances, are not expected tobe realized (see Note 5).

RelatedParty Transactions

TheCompany had a sales commission agreement with Clad Metal Products, Inc, whichis 100% owned by an executive officer of the Company. Under this agreement,which was terminated in 2005, the Company paid Clad Metal Products, Inc. 20% ofthe commissions that it earned on sales of certain non-explosion clad products.During the years ended December 31, 2005 and 2004, the Company paid commissionsof $13 and $7, respectively related to this agreement.

Nobelcladpurchases explosives used in its cladding operation from Nobel Explosifs France,which was a wholly owned subsidiary of Groupe SNPE, the parent company of SNPEwho is the Company’s former majority stockholder.  For the period ended May 15, 2006 and theyears ended December 31, 2005 and 2004, these purchases totaled $406, $820, and$739, respectively.  Accounts payable asof December 31, 2005 total $229 relating to these purchases.

Concentrationof Credit Risk

Financial instruments, which potentiallysubject the Company to a concentration of credit risk, consist primarily ofcash, restricted cash, cash equivalents and accounts receivable. Generally, theCompany does not require collateral to secure receivables. At December 31, 2006the Company has no significant financial instruments with off-balance sheetrisk of accounting losses, such as options contracts or other foreign currencyhedging arrangements.

Other CumulativeComprehensive Income

Other cumulative comprehensive income asof December 31, 2006, 2005 and 2004 consisted entirely of currency translationadjustment.

Recent AccountingPronouncements

In July 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — an interpretation of FASB No. 109* (“FIN 48”),which clarifies the accounting and disclosure for uncertainty in taxpositions.  FIN 48 seeks to harmonizecertain accounting practices associated with the recognition and measurement ofincome taxes.  This interpretation iseffective for fiscal years beginning after December 15, 2006.  The Company has not yet determined the impactthat this interpretation will have on its results ofoperations or financialposition.

Reclassifications

Certain prior year balances inthe consolidated financial statements and notes have been reclassified toconform with the 2006 presentation.

 

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(3)           DEBT

Long-term debt consists of the following at December31, 2006 and 2005:

|                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Term loan - French bank               |       | $        | 764        |     | $          | 1,029 |   |
| Industrial development  revenue bonds |       | —   |       | 1,720    |       |
|                                  |       |     |       |     |       |
|                                  |       | 764      |       | 2,749    |       |
| Less current maturities               |       | (382     | )          | (528     | )          |
|                                  |       |     |       |     |       |
| Long-term debt                        |       | $        | 382        |     | $          | 2,221 |   |

 

BankLines of Credit

The Company has a $10,000 credit facility with Wells Fargo Bank,National Association (“the Bank”) which expires on June 30, 2008.  The credit facility allows for Euro-denominatedadvances up to a $2,000 equivalent. Dollar-denominated advances bear interest at either the Bank’s primerate less 0.5% (7.25% as of December 31, 2006) or LIBOR plus 2% (the rateselection is at the Company’s option subject to certain conditions).  Euro-denominated advances bear interest atEURIBOR plus 2% (5.62% as of December 31, 2006).  Borrowings on the credit facility are securedby accounts receivable, inventory and any equipment acquired after the date ofthe agreement.  There were no borrowingsoutstanding on the credit facility as of December 31, 2006.

Inaddition, the Company maintains a 4,000 Swedish Krona line of credit ($584based upon the December 31, 2006 exchange rate) with a Swedish bank for itsNitro Metall operations..  As of December31, 2006, there were no outstanding borrowings under this line of credit.  Borrowings under the line of credit aresecured by real estate used in Nitro Metall’s operations.  This line of credit carries an interest rateequal to the basic rate stipulated by the Central Bank of Sweden (“Repo Rate”),which was 3.0% as of December 31, 2006. Consistent with previous years, the line of credit expired on December31, 2006 and was renewed on January 1, 2007 for additional 1 year term.

SNPES.A. Line of Credit

TheCompany’s subsidiary, Nobelclad, had a line of credit or “cash agreement” withGroupe SNPE that provided for up to 2 million Euros in cash advances to meetthe working capital needs of Nobelclad. Amounts outstanding under this agreement bore interest at EURIBOR plus1.5%.  The agreement automaticallyterminated when Groupe SNPE lost its indirect control of Nobelclad whichoccurred when SNPE sold off its shares of the Company’s common stock.  The line of credit had an outstanding balanceof 38 Euros ($45 based upon the December 31, 2005 exchange rate) as of December31, 2005, which was repaid prior to May 15, 2006.

TermLoan — French Bank

InJune 2001, Nobelclad obtained a term loan from a French bank that provides forborrowings of 1,448 Euros ($1,912 based upon the December 31, 2006 exchangerate), of which 579 Euros ($764) was outstanding as of December 31, 2006.  Borrowings under the term loan bear interestat EURIBOR plus 0.4%.  The interest rateon outstanding borrowings as of December 31, 2006 was 4.02%.  Beginning on June 21, 2004 and on eachanniversary date thereafter until final maturity on June 21, 2008, principalpayments of 290 Euros are required.

IndustrialDevelopment Revenue Bonds

During September 1998, the Company began construction on a newmanufacturing facility in Fayette County, Pennsylvania. This project wasfinanced with proceeds from industrial development revenue bonds issued by theFayette County Industrial Development Authority. The loan bore interest at avariable rate. Principal payments, which varied in

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amount, were paidon a quarterly basis throughout the life of the bonds.  On September 1, 2006, the Company exercisedits rights for early redemption of the industrial development revenue bonds,which had a then outstanding principal balance of $1,630.  The interest rate at September 1, 2006 was3.55%.

LoanCovenants and Restrictions

TheCompany’s existing loan agreements include various covenants and restrictions,certain of which relate to the incurrence of additional indebtedness,mortgaging, pledging or disposition of major assets, limits on capitalexpenditures and maintenance of specified financial ratios.  As of December 31, 2006, the Company was incompliance with all financial covenants and other provisions of its debt agreements.

Scheduled Debt Maturity

TheCompany’s long-term debt matures as follows:

| Year ended December 31- |   |   |   |
|----------------------------------------|--------|--------|--------|
| 2007                                   |   | $      | 382    |   |
| 2008                                   |   | 382    |   |
|                                   |   | $      | 764    |   |

 

(4)       STOCKOWNERSHIP AND BENEFIT PLANS

Throughits 1997 Equity Incentive Plan (“1997 Plan”), the Company had provided forgrants of both incentive stock options and non-statutory stock options. OnSeptember 21, 2006, the Company’s stockholders approved, and the Companyadopted, the 2006 Stock Incentive Plan (“2006 Plan”).  Upon the adoption of the 2006 Plan, the 1997Plan was terminated with respect to new grants of stock options; however, allunexercised options previously granted under the 1997 Plan remainoutstanding.  The 2006 Plan provides for thegrant of various types of equity-based incentives, including stock options,restricted stock, restricted stock units, stock appreciation rights,performance shares, performance units and other stock-based awards.  There are a total of 942,500 shares availablefor grant under the 2006 Plan (which includes 92,500 rolled over from the 1997Plan).  As of December 31, 2006, the onlyawards granted under the 2006 Plan were 52,250 shares of restricted stockleaving 890,250 shares available for future grant.

Priorto January 1, 2006, the Company accounted for its stock-based compensation planunder the recognition and measurement provisions of Accounting Principles BoardOpinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and relatedinterpretations, as permitted by Statement of Financial Accounting StandardsNo. 123, *Accounting and Disclosure of Stock-BasedCompensation*(“SFAS 123”). Accordingly, no stock-based compensation expense was recognized in theConsolidated Statements of Operations for the full year 2005 and 2004 becausethe options granted under the Company’s stock-based compensation plan hadexercise prices equal to the market value of the underlying common stock on thedate of grant.  Effective January 1,2006, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), *Share-BasedPayment*(“SFAS 123R”) using the modified prospective transitionmethod.  Under the transition method,compensation cost recognized in the full year 2006 includes: (a) compensationcost for all share-based payments granted prior to, but not yet vested, as ofJanuary 1, 2006, based on the grant date fair value estimated in accordancewith the original provisions of SFAS 123, and (b) compensation cost for allshare-based payments granted subsequent to January 1, 2006, based on the grantdate fair value estimated in accordance with SFAS 123R.

Priorto the adoption of SFAS 123R, the Company presented all tax benefits ofdeductions resulting from the exercise of stock options as operating cash flowsin the Consolidated Statements of Cash Flows. SFAS 123R requires tax benefits resulting from deductions in excess ofthe compensation cost recognized for those options (“excess tax benefits”) tobe classified as financing cash flows. The $1,154 excess tax benefit classified as a financing cash inflow inthe

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ConsolidatedStatements of Cash Flows for the year ended December 31, 2006 would have beenclassified as an operating cash inflow if the Company had not adopted SFAS123R.

Thefollowing table sets forth the total stock-based compensation expense includedin the Consolidated Statements of Operations as a result of adopting SFAS 123Ron January 1, 2006, and the related decrease in pretax income and net incomeand earnings per share compared to what it would have reported had it continuedto account for stock-based compensation under APB 25:

|                                                        | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|
| Cost of products  sold                                 |       | $        | 71         |   |
| General and  administrative expense                    |       | 493      |       |
| Selling expense                                        |       | 96       |       |
|                                                   |       |     |       |
| Stock-based  compensation expense  before income taxes |       | 660      |       |
| Income tax  benefit                                    |       | (148     | )          |
|                                                   |       |     |       |
| Stock-based  compensation expense,                     |       |     |       |
| net of income taxes                                    |       | $        | 512        |   |
|                                                   |       |     |       |
| Earnings per  share:                                   |       |     |       |
| Basic- income before income taxes                      |       | $        | 0.06       |   |
| Basic - net income                                     |       | $        | 0.04       |   |
| Diluted - income before income taxes                   |       | $        | 0.05       |   |
| Diluted - net income                                   |       | $        | 0.04       |   |

 

The following tableillustrates the effect on net income and basic and diluted earnings per shareif the Company had applied the fair value recognition provisions of SFAS 123 tostock-based compensation for the years ended December 31, 2005 and 2004.  For purposes of this pro forma disclosure,the value of the options is estimated using a Black-Scholes option-pricingmodel and amortized to expense over the options’ vesting periods.  The following assumptions were used in theoptions pricing model for the year ended December 31, 2005: a risk freeinterest rate of 3.7%; an expected volatility factor of 91.1%; an expecteddividend yield of 0.5%; and an expected life of 4 years.  The following assumptions were used in theoptions pricing model for the year ended December 31, 2004: a risk freeinterest rate of 3.1%; an expected volatility factor of 79.0%; an expecteddividend yield of 0.0%; and an expected life of 4 years.

|                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                      |       |     |       |     |       |
| Net income-as  reported                                                                                   |       | $        | 10,372     |     | $          | 2,833 |   |
| Deduct  stock-based compensation expense  determined under fair value method, net  of related tax effects |       | (481     | )          | (250     | )          |
|                                                                                                      |       |     |       |     |       |
| Pro forma net  income                                                                                     |       | $        | 9,891      |     | $          | 2,583 |   |
|                                                                                                      |       |     |       |     |       |
| Earnings per  share:                                                                                      |       |     |       |     |       |
| Basic-as reported                                                                                         |       | $        | 0.92       |     | $          | 0.28 |   |
| Basic-pro forma                                                                                           |       | $        | 0.88       |     | $          | 0.25 |   |
| Diluted-as reported                                                                                       |       | $        | 0.86       |     | $          | 0.27 |   |
| Diluted-pro forma                                                                                         |       | $        | 0.82       |     | $          | 0.24 |   |

 

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The Company’s stock-basedcompensation expense relates to stock option grants, restricted stock awardsand stock issued under the Employee Stock Purchase Plan .

Stock Options:  Under the 1997 Plan, incentive stock optionswere granted at exercise prices that equaled the fair market value of the stockat the date of grant based upon the closing sales price of the Company’s commonstock on that date. Incentive stock options generally vested 25% annually andexpired ten years from the date of grant. Non-statutory stock options weregenerally granted at exercise prices that equaled the fair market value of thestock at the date of grant. These options vested over periods ranging from oneto four years and had expiration dates ten years from the date of grant.  As of December 31, 2006, no options have beengranted under the 2006 plan.

The fair value for the singleoption granted since January 1, 2006 was estimated on the date of grant using aBlack-Scholes option-pricing model with the following assumptions: a risk freeinterest rate of 4.35%; an expected volatility factor of 86.6%; an expecteddividend yield of .375%; and an expected life of 4 years.  The computation of expected volatility isbased on historical volatility from the past four years, based on the currentexpected life of outstanding options. The computation of expected life is based on historical exercisepatterns.  The interest rate for periodswithin the contractual life of the award is based on the U.S. Treasury yieldcurve in effect at the time of grant. The fair value of the options granted during the year ended December 31,2006 was $22.30 per underlying share. Each grant is valued as a single award and compensation expense isrecognized on a straight-line basis over the vesting period.  In accordance with the modified prospectivetransition method, results for prior periods have not been restated.

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A summary of stock option activity for the years ended December 31, 2006,2005 and 2004 is as follows:
| ** **                        | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** | ** **    | ** ** |
|-----------------------------------|------------|-------------|------------|--------------|------------|---------------------------|------------|---------------|------------|
| ** **                        | ** ** | ** **  | ** ** | **Average**  | ** ** | **Average**               | ** ** | **Aggregate** | ** ** |
| ** **                        | ** ** | ** **  | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| ** **                        | ** ** | **Options** | ** ** | **Price**    | ** ** | **Contractual Term** | ** ** | **Value**     | ** ** |
| Balance at December 31,  2003     |       | 1,408,496   |       | $            | 1.92       |                      |       |          |       |   |
| Granted                           |       | 153,672     |       | 1.58         |       |                      |       |          |       |
| Exercised                         |       | (423,746    | )          | 1.98         |       |                      |       |          |       |
| Cancelled                         |       | (85,500     | )          | 1.34         |       |                      |       |          |       |
|                              |       |        |       |         |       |                      |       |          |       |
| Balance at December 31,  2004     |       | 1,052,922   |       | $            | 1.89       |                      |       |          |       |   |
| Granted                           |       | 246,754     |       | 9.39         |       |                      |       |          |       |
| Exercised                         |       | (707,250    | )          | 2.10         |       |                      |       |          |       |
| Cancelled                         |       | (4,000      | )          | 4.87         |       |                      |       |          |       |
|                              |       |        |       |         |       |                      |       |          |       |
| Balance at December 31,  2005     |       | 588,426     |       | $            | 4.77       |                      |       |          |       |   |
| Granted                           |       | 20,000      |       | 35.21        |       |                      |       |          |       |
| Exercised                         |       | (167,400    | )          | 2.99         |       |                      |       |          |       |
| Cancelled                         |       | (74,426     | )          | 12.08        |       |                      |       |          |       |
|                              |       |        |       |         |       |                      |       |          |       |
| Balance at December 31,  2006     |       | 366,600     |       | $            | 5.76       |                      | 7.42       |          | $          | 8,331 |   |
|                              |       |        |       |         |       |                      |       |          |       |
| Exercisable at December  31, 2006 |       | 163,350     |       | $            | 4.34       |                      | 7.00       |          | $          | 3,881 |   |

 

The intrinsic value ofoptions exercised for the years ended December 31, 2006, 2005 and 2004 was$5,141, $11,256 and $1,444, respectively. As of December 31, 2006, there was $649 of total unrecognizedstock-based compensation cost related to unvested stock options.  The cost is expected to be recognized over aweighted average period of 0.98 years.

The following table summarizes information about employee stock optionsoutstanding and exercisable at December 31, 2006:
| ** **             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **Number of**           | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Options**                  | ** ** | **Average**                  | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| **Range of**      | ** ** | **Outstanding at**      | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | **Exercisable at** | ** ** | **Weighted** | ** ** |
| **Exercise**           | ** ** | **December 31,**        | ** ** | **Contractual Life**    | ** ** | **Average** | ** ** | **December 31,** | ** ** | **Average** | ** ** |
| **Prices**             | ** ** | **2006**                     | ** ** | **in Years**            | ** ** | **Exercise Price** | ** ** | **2006** | ** ** | **Exercise Price** | ** ** |
|                   |       |                         |       |                         |       |   |   |   |   |   |   |
| $ 1.13 - $1.68    |       | 170,100                      |       | 6.52                         |       | $ | 1.37 |   | 115,850 |   | $ | 1.41 |   |
| $ 4.87 - $4.87    |       | 156,500                      |       | 8.06                         |       | $ | 4.87 |   | 27,500 |   | $ | 4.87 |   |
| $ 20.62 -  $20.62 |       | 20,000                       |       | 8.42                         |       | $ | 20.62 |   | 20,000 |   | $ | 20.62 |   |
| $ 35.21 -  $35.21 |       | 20,000                       |       | 9.04                         |       | $ | 35.21 |   | — |   | $ | 0.00 |   |
|                   |       |                         |       |                         |       |   |   |   |   |   |   |
| $ 1.13 -  $20.62  |       | 366,600                      |       | 7.42                         |       | $ | 5.76 |   | 163,350 |   | $ | 4.34 |   |

 

Restricted StockAwards:  Restricted stock granted to theexecutive officers and employees of the Company vests in one-third incrementson the first, second and third anniversary of the grant.  Restricted stock granted to directors of the

52

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Company vests on the date of the second annual meeting following the dateof grant.  The fair value of therestricted stock awards is based on the fair value of the Company’s stock onthe date of grant and is amortized to compensation expense over the vestingperiod on a straight line basis.

The only restricted stockawards outstanding as of December 31, 2006 were 52,250 shares granted under the2006 Plan on September 21, 2006 and October 31, 2006.   These shares, none of which were vested asof December 31, 2006, had a weighted-average grant date fair value of $33.27per share.  As of December 31, 2006,there was $1,598 of total unrecognized stock-based compensation cost related tounvested restricted stock awards.  Thecost is expected to be recognized over a weighted average period of 1.75 years.

Employee Stock PurchasePlan

The Company has an EmployeeStock Purchase Plan (“ESPP”) which is authorized to issue up to 450,000 sharesof which 65,979 shares remain available for future purchases. The offeringsbegin on the first day following each previous offering (“Offering Date”) andend six months from the offering date (“Purchase Date”). The ESPP provides thatfull time employees may authorize the Company to withhold up to 15% of theirearnings, subject to certain limitations, to be used to purchase common stockof the Company at the lesser of 85% of the fair market value of the Company’scommon stock on the Offering Date or the Purchase Date. In connection with theESPP, 3,429, 10,794 and 39,362 shares of the Company’s stock were purchasedduring the years ended December 31, 2006, 2005 and 2004, respectively.  The Company’s total stock-based compensationexpense for 2006 of $660 detailed above includes $28 in compensation expenseassociated with the ESPP.   The pro formanet income calculation shown above reflects $35 and $25 in compensation expenseassociated with the ESPP for 2005 and 2004, respectively.  .

401(k) Plan

The Company offers acontributory 401(k) plan to its employees. The Company makes matchingcontributions equal to 100% of each employee’s contribution up to 3% and50% of the next 2% contributed by each employee.  Total Company contributions were $217, $184and $203 for the years ended December 31, 2006, 2005 and 2004,respectively.

(5)           INCOMETAXES

Thedomestic and foreign components of income before tax for the Company’s continuingoperations for the years ended December 31 are summarized below:

|          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|
| Domestic |       | $        | 20,638     |     | $          | 10,530   |       | $ | 5,541 |   |
| Foreign  |       | 9,970    |       | 5,075    |       | 823      |       |
|     |       |     |       |     |       |     |       |
|     |       | $        | 30,608     |     | $          | 15,605   |       | $ | 6,364 |   |

 

 

53

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The components of theprovision for income taxes for the Company’s continuing operations for theyears ended December 31 are as follows:

|                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Current - Federal  |       | $        | 5,341      |     | $          | 4,631    |       | $ | 198 |   |
| Current - State    |       | 783      |       | 349      |       | 40       |       |
| Current - Foreign  |       | 3,182    |       | 1,705    |       | 232      |       |
|               |       |     |       |     |       |     |       |
|               |       | 9,306    |       | 6,685    |       | 470      |       |
|               |       |     |       |     |       |     |       |
| Deferred - Federal |       | 1,922    |       | (1,283   | )          | 1,242    |       |
| Deferred - State   |       | 121      |       | (183     | )          | 183      |       |
| Deferred - Foreign |       | (8       | )          | 14       |       | 66       |       |
|               |       |     |       |     |       |     |       |
|               |       | 2,035    |       | (1,452   | )          | 1,491    |       |
|               |       |     |       |     |       |     |       |
|               |       | $        | 11,341     |     | $          | 5,233    |       | $ | 1,961 |   |

A reconciliation of the Company’s income tax provisionfor continuing operations computed by applying the Federal statutory income taxrate of 35% in 2006, 35% in 2005 and 34% in 2004 to income before taxes for theyears ended December 31 is as follows:

|                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income tax at  statutory rate                            |       | $        | 10,713     |     | $          | 5,463    |       | $ | 2,164 |   |
| State tax items, net                                             |       | 629      |       | 523      |       | 272      |       |
| Effect of difference  between U.S. Federal and Foreign tax rates |       | (217     | )          | (119     | )          | 18       |       |
| Permanent differences                                            |       | 245      |       | 924      |       | (80      | )          |
| Tax on foreign dividend  received                                |       | 634      |       | —   |       | —   |       |
| Tax credits related to  the amendment of prior year tax returns  |       | —   |       | (706     | )          | (413     | )          |
| Current year tax  credits                                        |       | (635     | )          | (934     | )          | —   |       |
| Changes in valuation  allowance                                  |       | (2       | )          | 177      |       | —   |       |
| Other                                                            |       | (26      | )          | (95      | )          | —   |       |
|                                                             |       |     |       |     |       |     |       |
| Provision for income taxes                                       |       | $        | 11,341     |     | $          | 5,233    |       | $ | 1,961 |   |

 

54

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The Company’s deferred tax assets and liabilities atDecember 31, 2006 and 2005 consist of the following:

|                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                               |       |     |       |     |       |
| Income tax  credit carryforward                    |       | $        | 115        |     | $          | 2,106 |   |
| State net  operating loss carryforward             |       | 42       |       | 120      |       |
| Inventory                                          |       | 32       |       | 84       |       |
| Allowance for  doubtful accounts                   |       | 98       |       | 86       |       |
| Repair reserve                                     |       | 44       |       | 183      |       |
| Vacation and  other compensation accrual           |       | 457      |       | 149      |       |
| Other                                              |       | 177      |       | 70       |       |
|                                               |       |     |       |     |       |
| Deferred tax  assets                               |       | 965      |       | 2,798    |       |
|                                               |       |     |       |     |       |
| Deferred tax  liabilities:                         |       |     |       |     |       |
| Depreciation and  amortization                     |       | (1,129   | )          | (1,230   | )          |
| Foreign income  taxable in future periods          |       | (105     | )          | (195     | )          |
| Deferred profit                                    |       | (360     | )          | —   |       |
|                                               |       |     |       |     |       |
| Deferred tax liabilities                           |       | (1,594   | )          | (1,425   | )          |
|                                               |       |     |       |     |       |
| Net deferred tax assets  / (liabilities)           |       | (629     | )          | 1,373    |       |
| Valuation allowance                                |       | (175     | )          | (177     | )          |
|                                               |       |     |       |     |       |
| Net deferred tax assets  / (liabilities)           |       | $        | (804       | )        | $          | 1,196 |   |
|                                               |       |     |       |     |       |
|                                               |       |     |       |     |       |
| Net current deferred  tax assets                   |       | $        | 708        |     | $          | 572 |   |
| Net long-term deferred  tax assets / (liabilities) |       | (1,512   | )          | 624      |       |
|                                               |       |     |       |     |       |
| Net deferred tax assets / (liabilities)            |       | $        | (804       | )        | $          | 1,196 |   |

As a result of stock option activity in 2006, 2005 and2004, the Company recorded tax benefits of $1,154, $3,728 and $311,respectively, directly to additional paid in capital.  Thus, these tax benefits, which reduce taxescurrently payable, are not reflected in the current income tax provision forthose years.

During the yearended December 31, 2005, the Company completed an analysis of prior year taxcredits and related items.  As a resultof the analysis, the Company filed amended federal and state income taxreturns.  The amended state returns reportedadditional net operating losses and credits above the amounts the Company hadpreviously recorded on its books and records. In assessing these additional losses and credits, the Company determinedthat the utilization of a portion of these was not probable, due to potentialchanges in the states in which the Company has income tax nexus.  Thus, the Company recorded a net valuationallowance of approximately $177 against the deferred tax assets during the yearended December 31, 2005.  As of December31, 2006, the balance of this valuation allowance is $175.

As of December 31,2006 and 2005, income considered to be permanently reinvested in non-U. S.subsidiaries totaled approximately $11,284 and $5,407, respectively.  Deferred income taxes have not been providedon this undistributed income, as the Company does not plan to initiate anyaction that would require the payment of U. S. income taxes on theseearnings.  It is not practical toestimate the amount of additional taxes that might be payable on these amountsof undistributed foreign income.  As aresult of providing current Federal and state income taxes on the remainingundistributed foreign earnings as of December 31, 2006 and 2005, $105 and $904are included in permanent differences reported in the above income tax ratereconciliations for 2006 and 2005, respectively.  For 2005, a related 

55

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foreign tax credit of$904 was reflected in the current year tax credits in the above income tax ratereconciliation and in the income tax credit carryforward in the above scheduleof deferred tax assets and liabilities as of December 31, 2005.  As of December 31, 2006, the net liability isreflected in deferred tax liabilities.

The components ofthe income tax credit carryforward as of December 31, 2006 are foreign taxcredits of $397 (which, if unused, expire between 2012 and 2016) and researchrelated state tax credits of $107 (which expire beginning in 2013), net ofreserves of $389 against prior research related federal and state credits.  The components of the income tax creditcarryforward as of December 31, 2005 are $904 of foreign tax credits notedabove, additional foreign tax credits of $365 (which, if unused, expire in 2012and 2013), research related tax credits of $701 (which expire beginning in2013), and alterative minimum tax credits of $136 (with no statutory expiration).

As of December 31,2006, the Company has state net operating loss carryforwards of approximately$812.  Portions of these carryforwards,if unused, will expire beginning at the end of 2010 with the last portion due toexpire in 2023.

(6)           BUSINESS SEGMENTS

The Company isorganized in the following two segments: the Explosive Metalworking segment and AMK Welding. The ExplosiveMetalworking segment uses explosives to perform metal cladding and shocksynthesis of industrial diamonds. The most significant product of this group isclad metal which is used in the fabrication of pressure vessels, heatexchangers and transition joints for various industries, including upstream oiland gas, oil refinery, petrochemicals, hydrometallurgy, aluminum production,shipbuilding, power generation, industrial refrigeration and similarindustries. AMK Welding utilizes a number of welding technologies to weldcomponents for manufacturers of jet engine and ground-based turbines.

The accountingpolicies of both segments are the same as those described in the summary ofsignificant accounting policies.  TheCompany’s reportable segments are strategic business units that offer differentproducts and services and are separately managed. Each segment is marketed todifferent customer types and requires different manufacturing processes andtechnologies.

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Segmentinformation is presented for the years ended December 31, 2006, 2005 and 2004as follows:
| ** **                                       | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                       | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| As of and for the year  ended December 31, 2006: |       |             |       |        |       |       |       |
| Net sales                                        |       | $                | 108,362    |        | $          | 5,110      |       | $ | 113,472 |   |
| Depreciation                                     |       | $                | 1,150      |        | $          | 219        |       | $ | 1,369 |   |
| Income from operations  of continuing operations |       | $                | 29,605     |        | $          | 1,158      |       | $ | 30,763 |   |
| Unallocated  amounts:                            |       |             |       |        |       |       |       |
| Stock-based  compensation                        |       |             |       |        |       | (660       | )          |
| Other expense                                    |       |             |       |        |       | (115       | )          |
| Interest expense                                 |       |             |       |        |       | (84        | )          |
| Interest income                                  |       |             |       |        |       | 704        |       |
|                                             |       |             |       |        |       |       |       |
| Consolidated  income before income taxes         |       |             |       |        |       | $          | 30,608     |   |
|                                             |       |             |       |        |       |       |       |
| Segment assets                                   |       | $                | 57,271     |        | $          | 4,618      |       | $ | 61,889 |   |
| Assets not allocated to  segments:               |       |             |       |        |       |       |       |
| Cash and cash  equivalents                       |       |             |       |        |       | 17,886     |       |
| Restricted cash                                  |       |             |       |        |       | 3,059      |       |
| Prepaid expenses  and other assets               |       |             |       |        |       | 1,431      |       |
| Current deferred  tax assets                     |       |             |       |        |       | 708        |       |
|                                             |       |             |       |        |       |       |       |
| Consolidated  total assets                       |       |             |       |        |       | $          | 84,973     |   |
|                                             |       |             |       |        |       |       |       |
| Capital expenditures                             |       | $                | 7,342      |        | $          | 1,308      |       | $ | 8,650 |   |

 

57

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| ** **                                            | ** ** | **Explosive**    | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|------------|------------|
| ** **                                            | ** ** | **Metalworking** | ** ** | **AMK**     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Group**        | ** ** | **Welding** | ** ** | **Total**  | ** ** |
| As of and for the year  ended December 31, 2005:      |       |             |       |        |       |       |       |
| Net sales                                             |       | $                | 75,582     |        | $          | 3,709      |       | $ | 79,291 |   |
| Depreciation                                          |       | $                | 1,328      |        | $          | 199        |       | $ | 1,527 |   |
| Income from operations  of continuing operations      |       | $                | 15,160     |        | $          | 608        |       | $ | 15,768 |   |
| Unallocated  amounts:                                 |       |             |       |        |       |       |       |
| Other expense                                         |       |             |       |        |       | (7         | )          |
| Interest expense                                      |       |             |       |        |       | (219       | )          |
| Interest income                                       |       |             |       |        |       | 63         |       |
|                                                  |       |             |       |        |       |       |       |
| Consolidated  income before income taxes              |       |             |       |        |       | $          | 15,605     |   |
|                                                  |       |             |       |        |       |       |       |
| Segment assets                                        |       | $                | 37,940     |        | $          | 2,949      |       | $ | 40,889 |   |
| Assets not allocated to  segments:                    |       |             |       |        |       |       |       |
| Cash and cash  equivalents                            |       |             |       |        |       | 5,763      |       |
| Marketable  securities                                |       |             |       |        |       | 1,950      |       |
| Prepaid expenses  and other assets                    |       |             |       |        |       | 898        |       |
| Current deferred  tax assets                          |       |             |       |        |       | 572        |       |
| Deferred tax  assets                                  |       |             |       |        |       | 819        |       |
| Other receivables  related to discontinued operations |       |             |       |        |       | 681        |       |
| Assets of  discontinued operations                    |       |             |       |        |       | 3,739      |       |
|                                                  |       |             |       |        |       |       |       |
| Consolidated  total assets                            |       |             |       |        |       | $          | 55,311     |   |
|                                                  |       |             |       |        |       |       |       |
| Capital expenditures                                  |       | $                | 2,217      |        | $          | 631        |       | $ | 2,848 |   |

 
| ** **                                            | ** ** | **Explosive**    | ** **   | ** **  | ** ** | ** ** | ** **   |
|-------------------------------------------------------|------------|------------------|--------------|-------------|------------|------------|--------------|
| ** **                                            | ** ** | **Metalworking** | ** **   | **AMK**     | ** ** | ** ** | ** **   |
| ** **                                            | ** ** | **Group**        | ** **   | **Welding** | ** ** | **Total**  | ** **   |
| As of and for the year  ended December 31, 2004:      |       |             |         |        |       |       |         |
| Net sales                                             |       | $                | 51,375       |        | $          | 2,790      |         | $ | 54,165 |   |
| Depreciation                                          |       | $                | 1,138        |        | $          | 249        |         | $ | 1,387 |   |
| Income from operations  of continuing operations      |       | $                | 6,609        |        | $          | 279        |         | $ | 6,888 |   |
| Unallocated  amounts:                                 |       |             |         |        |       |       |         |
| Other income                                          |       |             |         |        |       | 7          |         |
| Interest expense                                      |       |             |         |        |       | (554       | )            |
| Interest income                                       |       |             |         |        |       | 23         |         |
|                                                  |       |             |         |        |       |       |         |
| Consolidated  income before income taxes              |       |             |         |        |       | $          | 6,364        |   |
|                                                  |       |             |         |        |       |       |         |
| Segment assets                                        |       | $                | 32,459  |        | $          | 2,211      |         | $ | 34,670 |   |
| Assets not allocated to  segments:                    |       |             |         |        |       |       |         |
| Cash and cash  equivalents                            |       |             |         |        |       | 2,404      |         |
| Prepaid expenses  and other assets                    |       |             |         |        |       | 655        |         |
| Current deferred  tax assets                          |       |             |         |        |       | 436        |         |
| Other  receivables related to discontinued operations |       |             |         |        |       | 1,696      |         |
| Assets of  discontinued operations                    |       |             |         |        |       | 3,892      |         |
|                                                  |       |             |         |        |       |       |         |
| Consolidated  total assets                            |       |             |         |        |       | $          | 43, 753 |   |
|                                                  |       |             |         |        |       |       |         |
| Capital expenditures                                  |       | $                | 1,004        |        | $          | 134        |         | $ | 1,138 |   |

 

 

58

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The geographic location of the Company’sproperty, plant and equipment, net of accumulated depreciation, is as follows:

 

|               | ** ** | **As of December 31,** | ** ** |
|---------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $                                     | 16,242     |   | $ | 9,387 |   | $ | 8,721 |   |
| France        |       | 3,298                                 |       | 2,751 |   | 2,755 |   |
| Sweden        |       | 720                                   |       | 434 |   | 368 |   |
|          |       |                                  |       |   |   |   |   |
| Total         |       | $                                     | 20,260     |   | $ | 12,572 |   | $ | 11,844 |   |

 

Allof the Company’s sales are shipped from the manufacturing locations located inthe United States, France and Sweden. The following represents the Company’snet sales based on the geographic location of the customer:

 

|                         | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States           |       | $                                                             | 56,395     |   | $ | 32,126 |   | $ | 24,527 |   |
| Russia                  |       | 11,137                                                        |       | 838 |   | 253 |   |
| Canada                  |       | 10,787                                                        |       | 7,562 |   | 4,924 |   |
| France                  |       | 4,791                                                         |       | 2,417 |   | 1,662 |   |
| India                   |       | 3,764                                                         |       | 140 |   | 71 |   |
| Italy                   |       | 3,466                                                         |       | 2,208 |   | 2,236 |   |
| South Korea             |       | 3,080                                                         |       | 7,771 |   | 409 |   |
| Belgium                 |       | 2,546                                                         |       | 2,495 |   | 2,591 |   |
| Spain                   |       | 2,465                                                         |       | 5,369 |   | 957 |   |
| Germany                 |       | 2,265                                                         |       | 939 |   | 1,978 |   |
| Netherlands             |       | 1,967                                                         |       | 2,757 |   | 1,218 |   |
| China                   |       | 1,055                                                         |       | 3,368 |   | 310 |   |
| Malaysia                |       | 358                                                           |       | 5,148 |   | 83 |   |
| Australia               |       | 235                                                           |       | 1,940 |   | 5,454 |   |
| Other foreign countries |       | 9,161                                                         |       | 4,213 |   | 7,492 |   |
|                    |       |                                                          |       |   |   |   |   |
| Total                   |       | $                                                             | 113,472    |   | $ | 79,291 |   | $ | 54,165 |   |

 

Duringthe years ended December 31, 2006, 2005 and 2004, no one customer accounted formore than 10% of total net sales.

(7)           COMMITMENTS AND CONTINGENCIES

The Company leases certain office space, storagespace, vehicles and other equipment under various operating lease agreements.Future minimum rental commitments under non-cancelable operating leases are asfollows:

 

| Year ended December 31- |   |   |   |
|----------------------------------------|--------|--------|--------|
| 2007                                   |   | $      | 342    |   |
| 2008                                   |   | 313    |   |
| 2009                                   |   | 301    |   |
| 2010                                   |   | 184    |   |
| 2011                                   |   | 69     |   |
| Thereafter                             |   | 109    |   |
|                                   |   |   |   |
|                                   |   | $      | 1,318  |   |

 

59

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Total rental expense included inoperations was $596, $603 and $529 for the years ended December 31, 2006,2005 and 2004, respectively.

Inthe normal course of business, the Company is a party to various contractualdisputes and claims. After considering the Company’s evaluations by legalcounsel regarding pending actions, management is of the opinion that theoutcome of such actions will not have a material adverse effect on thefinancial position or results of operations of the Company.

(8)       DISCONTINUED OPERATIONS

OnSeptember 17, 2004, DMC completed the divestiture of its Spin Forge divisionunder an agreement that involved subleasing the Spin Forge real estate andleasing the manufacturing equipment and tooling to a third party.  Under the master agreement relating to thisdivestiture transaction, the Company sold all inventory, books and records,intangible personal property, business information and technology, customercontracts, and licenses and permits relating to the Spin Forge business to thisthird party for a sales price of approximately $1,700.  The third party also assumed fullresponsibility for Spin Forge business activities and operating expenses.  Despite the fact that the Company retainedownership of the equipment and continued to carry a capital lease asset of$2,880 on its books, the Company concluded that the Spin Forge divestituretransaction qualified for treatment as discontinued operations since theCompany had completely exited the Spin Forge operating business and had nointent to ever again operate any of the leased assets.  In December 2006, the third party purchaserof the Spin Forge business purchased the majority of these leased assets whilethe remainder of the leased assets was liquidated by the Company.  This transaction resulted in a pretax gain of$228, which was recorded as discontinued operations in the fourth quarter of 2006.   The Company had received rent of $23 permonth on these leased assets until the date of their sale.

On January 10,2006, the Company sold its purchase option on the Spin Forge real estate to theproperty owner for $2,300.  Thecompletion of this transaction resulted in a pretax gain of $2,197, which wasrecorded as discontinued operations in the first quarter of 2006.  In connection with the sale of the purchaseoption, the underlying lease agreement was terminated.  Accordingly, the capital lease asset of$2,880 and the related lease obligation of the same amount was removed from theCompany’s balance sheet in the first quarter of 2006.

Assetsof discontinued operations were comprised of the following as of December 31,2005:

 

| Leased manufacturing  equipment          |   | $      | 859    |   |
|------------------------------------------|--------|--------|--------|--------|
| Capital lease asset -  real estate       |   | 2,880  |   |
|                                     |   |   |   |
| Total assets of  discontinued operations |   | $      | 3,739  |   |

 

Aspart of the September 17, 2004 divestiture of Spin Forge, the Company soldinventory totaling $1,697 and the sale of this inventory was reflected in otherreceivables.    As of December 31, 2005,the remaining receivable totaled $681 and was classified as long-term.  This receivable was repaid in December 2006.

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Operatingresults of the discontinued operation for the years ended December 31, 2006,2005 and 2004 are summarized as follows:

 
| ** **                                                 | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                  |       | $                                                             | —     |   | $ | — |   | $ | 1,790 |   |
|                                                       |       |                                                          |       |   |   |   |   |
| Loss from discontinued  operations                         |       | $                                                             | —     |   | $ | — |   | $ | (1,284 | ) |
| Related income tax benefit  (expense)                      |       | —                                                        |       | — |   | 501 |   |
| Loss from discontinued  operations, net of tax             |       | $                                                             | —     |   | $ | — |   | $ | (783 | ) |
|                                                       |       |                                                          |       |   |   |   |   |
| Gain (loss) on sale of  discontinued operations            |       | $                                                             | 2,425      |   | $ | — |   | $ | (1,290 | ) |
| Related income tax  benefit                                |       | (928                                                          | )          | — |   | 503 |   |
| Gain (loss) on sale of discontinued operations, net of tax |       | $                                                             | 1,497      |   | $ | — |   | $ | (787 | ) |

 

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**ITEM 9.                  Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

Thereare no changes in or disagreements with accountants on accounting and financialdisclosure for the fiscal year ended December 31, 2006.

**ITEM****9A****.               Controlsand Procedures**

**Evaluation of Disclosure Controls and Procedures**

Our Chief Executive Officerand Chief Financial Officer have evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934).  Basedon such evaluation, such officers have concluded that our disclosure controlsand procedures are effective as of the end of the period covered by this AnnualReport.

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**Management’sReport on Internal Control over Financial Reporting**

The management of DynamicMaterials Corporation (“DMC”) is responsible for establishing and maintainingadequate internal control over financial reporting, as such term is defined inExchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with theparticipation of DMC’s management, including its Chief Executive Officer andChief Financial Officer, management conducted an evaluation of theeffectiveness of DMC’s internal control over financial reporting as ofDecember 31, 2006 based on the framework in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  In designing and evaluating the internalcontrol over financial reporting, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Based on that evaluation,management concluded that DMC’s internal control over financial reporting waseffective as of December 31, 2006.

Management’s assessment ofthe effectiveness of DMC’s internal control over financial reporting as ofDecember 31, 2006 has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report whichis included elsewhere herein.

 
|        |   |   | /s/  Yvon Pierre Cariou           |   |
|--------|--------|--------|----------------------------------------|--------|
|   |   |   | Yvon Pierre Cariou                     |
|   |   |   | President and Chief Executive Officer  |
|   |   |   | March 8, 2007                          |
|   |   |   |                                   |
|   |   |   | /s/  Richard  A. Santa            |   |
|   |   |   | Richard A. Santa                       |
|   |   |   | Vice President Chief Financial Officer |
|   |   |   | March 8, 2007                          |

** **

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**Reportof Independent Registered Public Accounting Firm**

The Stockholders and the

Board of Directors ofDynamic Materials Corporation:

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Dynamic Materials Corporation (the “Company)maintained effective internal control over financial reporting as ofDecember 31, 2006, based on criteria established in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Dynamic MaterialsCorporation’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Dynamic Materials Corporation maintained effective internalcontrol over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on the COSO criteria. Also, in ouropinion, Dynamic Materials Corporation maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on the COSO criteria**.**

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Dynamic MaterialsCorporation and subsidiary as of December 31, 2006 and 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006and our report dated March 6, 2007 expressed an unqualified opinion thereon.

 /s/Ernst & Young LLP

Denver, Colorado

March 6, 2007

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**ITEM****9B****.               OtherInformation**

Not applicable.

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**PART III**

**ITEM 10**.**                                              Directors,Executive Officers and Corporate Governance**

Item 10 incorporatesinformation by reference to our 2007 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2006.

**ITEM 11.               ExecutiveCompensation**

Item 11 incorporatesinformation by reference to our 2007 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2006.

**ITEM 12**.**                                              SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

Item 12 incorporatesinformation by reference to our 2007 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2006.

**ITEM 13.               CertainRelationships and Related Transactions, and Director Independence**

Item 13 incorporatesinformation by reference to our 2007 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2006.

**ITEM****14****.               PrincipalAccountant Fees and Services**

Item 14 incorporatesinformation by reference to our 2007 Proxy Statement for the Annual for theAnnual Meeting of Shareholders, which is expected to be filed with theSecurities and Exchange Commission within 120 days of the close of fiscal year2006.

**ITEM 15**.**                                              Exhibitsand Financial Statement Schedules**

(a)           **Financial Statements**

See Index to Financial Statements in Item 8 of thisAnnual Report on Form 10-K, which is incorporated herein by reference.

 (b)          **Exhibits**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                 |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Employee Stock Purchase Plan, dated January 9, 1998  (incorporated by reference to the Company’s Definitive Proxy Statement filed  with the Commission on April 22, 1998).            |
| 10.2            |       | Operating Lease, dated as of March 18, 1998, between  Company and Spin Forge, LLC (incorporated by reference to the Company’s Form  8-K filed with the Commission on April 2, 1998).  |
| 10.3            |       | Option Agreement, dated as of March 18, 1998,  between Company and Spin Forge, LLC (incorporated by reference to the  Company’s Form 8-K filed with the Commission on April 2, 1998). |

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| 10.4  |   | Loan Agreement between Company and Fayette County  Industrial Development Authority, dated September 1, 1998 (incorporated by  reference to the Company’s Form 10-Q filed with the Commission on November  17, 1998).                        |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5  |   | Amended and Restated Employee Stock Option Plan  approved by the Directors of the Company on March 26, 1999 (incorporated by  reference to the Company’s Definitive Proxy Statement filed with the  Commission on April 26, 1999).           |
| 10.6  |   | Stock Purchase Agreement, dated January 20, 2000,  between the Company and SNPE, Inc. (incorporated by reference to the  Company’s Form 8-K filed with the Commission on January 31, 2000).                                                  |
| 10.7  |   | Agreement and Amendment to Operating Lease, dated as  of February 1, 2000 between the Company and Spin Forge, LLC  (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 30, 2000).                 |
| 10.8  |   | Form of Directors and Officers Indemnification  Agreement (incorporated by reference to the Company’s Form 10-K filed with  the Commission on March 30, 2000).                                                                               |
| 10.9  |   | Stock Purchase Agreement, dated as of January 20,  2000, between the Company and SNPE, Inc. (incorporated by reference to the  Company’s Definitive Proxy Statement filed with the Commission on May 9,  2000).                              |
| 10.10 |   | Amendment Number One to Stock Purchase Agreement,  dated as of April 20, 2000, between the Company and SNPE, Inc. (incorporated  by reference to the Company’s Form 10-Q filed with the Commission on May 12,  2000).                        |
| 10.11 |   | Credit Facility and Security Agreement, dated as of  June 14, 2000, between the Company and SNPE, Inc. (incorporated by reference  to the Company’s Form 8-K filed with the Commission on June 22, 2000).                                    |
| 10.12 |   | Convertible Subordinated Note, dated as of June 14,  2000, between the Company and SNPE, Inc. (incorporated by reference to the  Company’s Form 8-K filed with the Commission on June 22, 2000).                                             |
| 10.13 |   | Stock  Purchase Agreement, dated June 28, 2001, between DMC and Nobel Explosifs  France (incorporated by reference to the Company’s Form 8-K filed with the  Commission on July 16, 2001).                                                   |
| 10.14 |   | Term  Loan Agreement, dated July 3, 2001, between DMC and SNPE, Inc. (incorporated  by reference to the Company’s Form 10-K filed with the Commission on March  26, 2002).                                                                   |
| 10.15 |   | Stock  Pledge Agreement, dated July 3, 2001, between DMC and SNPE, Inc.  (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 26, 2002).                                                                |
| 10.16 |   | Credit  and Security Agreement, dated December 4, 2001, between DMC and Wells Fargo  Business Credit, Inc. (incorporated by reference to the Company’s Form 10-K  filed with the Commission on March 26, 2002).                              |
| 10.17 |   | Agreement, dated as of September 17, 2004, between  the Company and Aerojet (incorporated by reference to the Company’s Current  Report on Form 8-K filed with the Commission on September 23, 2004)                                         |
| 10.18 |   | Transition Services Agreement, dated as of September  17, 2004, between the Company and Aerojet (incorporated by reference to the  Company’s Current Report on Form 8-K filed with the Commission on September  23, 2004)                    |
| 10.19 |   | Equipment Lease Agreement, dated as of September 17,  2004, between the Company and Aerojet (incorporated by reference to the Company’s  Current Report on Form 8-K filed with the Commission on September 23, 2004)                         |
| 10.20 |   | Sublease, dated as of September 17, 2004, between  the Company and Aerojet (incorporated by reference to the Company’s Current  Report on Form 8-K filed with the Commission on September 23, 2004)                                          |
| 10.21 |   | Amendment Number 5 to Option Agreement, , dated as  of September 17, 2004, between the Company and Spin Forge, LLC (incorporated  by reference to the Company’s Current Report on Form 8-K filed with the  Commission on September 23, 2004) |
| 10.22 |   | Option Agreement, dated as of September 17, 2004,  between the Company and Aerojet (incorporated by reference to the Company’s  Current Report on Form 8-K filed with the Commission on September 23, 2004)                                  |
| 10.23 |   | Employment Agreement, dated as of March 3, 2005, by  and between the Company and Yvon Cariou (incorporated by reference to the  Company’s Form 10-K filed with the Commission on March 22, 2005)                                             |
| 10.24 |   | Employment Agreement, dated as of March 3, 2005, by  and between the Company and John G. Banker (incorporated by reference to the  Company’s Form 10-K filed with the Commission on March 22, 2005)                                          |
| 10.25 |   | Employment Agreement, dated as of March 3, 2005, by  and between the Company and Richard A. Santa                                                                                                                                                 |

 

67

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|       |   | (incorporated by reference to the Company’s Form  10-K filed with the Commission on March 22, 2005)                                                                                                                                                                                                                     |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26 |   | Credit Agreement dated as of September 15, 2005  between Dynamic Materials Corporation and Wells Fargo Bank, National  Association (incorporated by reference to the Company’s Current Report on  Form8-K filed with the Commission on September 21, 2005)                                                              |
| 10.27 |   | $7,500,000 Revolving Line of Credit Note dated  September 15, 2005 of Dynamic Materials Corporation payable to the order of  Wells Fargo Bank, National Association (incorporated by reference to the  Company’s Current Report on Form 8-K filed with the Commission on September  21, 2005)                           |
| 10.28 |   | Option Purchase Agreement, dated November 4, 2005,  by and between the Company and Spin Forge, LLC (incorporated by reference to  the Company Form 10-Q filed with the Commission on November 9, 2005)                                                                                                                       |
| 10.29 |   | Supply Agreement, dated as of November 29, 2005, by  and between General Electric Company, through its GE Energy Business, and  Dynamic Materials Corporation, through its AMK Welding Division (incorporated  by reference to the Company’s Current Report on Form 8-K filed with the  Commission on December 5, 2005) |
| 10.30 |   | First Amendment to Credit Agreement dated as of  March 31, 2006 (incorporated by reference to the Company’s Current Report on  Form 8-K filed with the Commission on April 5, 2006)                                                                                                                                     |
| 10.31 |   | Dynamic Materials Corporation 2006 Stock Incentive  Plan (incorporated by reference to the Company’s Form 10-Q filed with the  Commission on November 2, 2006)                                                                                                                                                          |
| 21.1  |   | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                  |
| 23.1  |   | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                             |
| 31.1  |   | Certification of the President and Chief Executive  Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                 |
| 31.2  |   | Certification of the Vice President and Chief  Financial Officer pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                            |
| 32.1  |   | Certification of the President and Chief Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                       |
| 32.2  |   | Certification of the Vice President and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  |
| 99.1  |   | Letter from DMC to the SEC regarding the Company’s  Auditors (incorporated by reference to the Company’s Form 10-K filed with the  Commission on March 26, 2002).                                                                                                                                                  |

 

(c)           **Financial Statement Schedules**

See Schedule II beginningon page 73 of this Annual Report on Form 10-K.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

|                   | **Dynamic  Materials Corporation** |
|-------------------|------------------------------------|
| ** **        | ** **                         | ** ** |
| **March 8, 2007** | ** **                         | ** ** |
| ** **        | **By:**                            | **/s/ Richard A. Santa** | ** ** | ** ** |
|              |                               | Richard A. Santa |
|              |                               | Vice President and  Chief Financial Officer |
|              |                               |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Company and in thecapacities and on the dates indicated.
| SIGNATURE               | ** ** | **TITLE**                                                   | ** ** | **DATE**      |
|-------------------------|------------|-------------------------------------------------------------|------------|---------------|
|                    |       |                                                        |       |          |
| /s/ Yvon Pierre  Cariou |       | President and Chief Executive Officer                       |       | March 8, 2007 |
| Yvon Pierre  Cariou     |       | (Principal Executive Officer)                               |       |          |
|                    |       |                                                        |       |          |
| /s/ Richard A.  Santa   |       | Vice President and Chief Financial Officer                  |       | March 8, 2007 |
| Richard A. Santa        |       | (Principal Financial and Accounting Officer)                |       |          |
|                    |       |                                                        |       |          |
| /s/ John G.  Banker     |       | Vice President, Marketing & Sales, Clad Metal  Division |       | March 8, 2007 |
| John G. Banker          |       | (Executive Officer)                                         |       |          |
|                    |       |                                                        |       |          |
| /s/ Dean K.  Allen      |       | Chairman and Director                                       |       | March 8, 2007 |
| Dean K. Allen           |       |                                                        |       |          |
|                    |       |                                                        |       |          |
| /s/ Bernard  Hueber     |       | Director                                                    |       | March 8, 2007 |
| Bernard Hueber          |       |                                                        |       |          |
|                    |       |                                                        |       |          |
| /s/ Gerard  Munera      |       | Director                                                    |       | March 8, 2007 |
| Gerard Munera           |       |                                                        |       |          |

 

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**DYNAMICMATERIALS CORPORATION**

**INDEX TOSCHEDULE II**

**AS OFDECEMBER 31, 2006**

|                                                          |   |   |
|----------------------------------------------------------|--------|--------|
| Report of  Independent Registered Public Accounting Firm |   |   |
| Schedule  II (a)                                         |   |   |
| Schedule II (b)                                          |   |   |
| Schedule II (c)                                          |   |   |

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**Report of Independent Registered Public Accounting Firm**

Tothe Stockholders and the

Board of Directors of Dynamic MaterialsCorporation:

We have audited theconsolidated financial statements of Dynamic Materials Corporation andsubsidiary as of December 31, 2006 and 2005, and for each of the threeyears in the period ended December 31, 2006, and have issued our report thereondated March 6, 2007 (included elsewhere in this Form 10-K). Our audits alsoincluded the financial statement schedules listed in Item 15 of this Form 10-K.These schedules are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these schedules based on our audits.

In our opinion, thefinancial statement schedules referred to above, when considered in relation tothe basic financial statements taken as a whole, present fairly in all materialrespects the information set forth therein.

/s/ ERNST & YOUNG LLP

Denver, Colorado

March6, 2007

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DYNAMICMATERIALS CORPORATION

SCHEDULEII(a) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

ALLOWANCEFOR DOUBTFUL ACCOUNTS

 

 
| ** **             | ** ** | **Balance at  beginning  of period** | ** ** | **Additions  charged to  income** | ** ** | **Accounts  receivable  written off** | ** ** | **Other  Adjustments** | ** ** | **Balance at  end of  period** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|------------------------|------------|------------------------------------------|------------|
| Year ended - |       |                                           |       |                                   |       |                                       |       |                   |       |                                     |       |
| ** **             |       |                                           |       |                                   |       |                                       |       |                   |       |                                     |       |
| December 31,  2004     |       | $                                              | 217        |                                   | $          | 85                                         |       | $                      | (22        | )                                        | $          | — |   | $ | 280 |   |
|                   |       |                                           |       |                                   |       |                                       |       |                   |       |                                     |       |
| December 31,  2005     |       | $                                              | 280        |                                   | $          | 49                                         |       | $                      | (28        | )                                        | $          | — |   | $ | 301 |   |
|                   |       |                                           |       |                                   |       |                                       |       |                   |       |                                     |       |
| December 31, 2006      |       | $                                              | 301        |                                   | $          | 42                                         |       | $                      | (7         | )                                        | $          | (76 | ) | $ | 260 |   |

 

DYNAMICMATERIALS CORPORATION

SCHEDULEII(b) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

WARRANTYRESERVE
| ** **             | ** ** | **Balance   at  beginning  of period** | ** ** | **Additions  charged   to  income** | ** ** | **Repairs  allowed** | ** ** | **Balance   at  end of  period** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|----------------------|------------|--------------------------------------------|------------|
| Year ended - |       |                                             |       |                                     |       |                 |       |                                       |       |
|                   |       |                                             |       |                                     |       |                 |       |                                       |       |
| December 31,  2004     |       | $                                                | 150        |                                     | $          | 30                   |       | $                                          | (39        | ) | $ | 141 |   |
|                   |       |                                             |       |                                     |       |                 |       |                                       |       |
| December 31,  2005     |       | $                                                | 141        |                                     | $          | 498                  |       | $                                          | (118       | ) | $ | 521 |   |
|                   |       |                                             |       |                                     |       |                 |       |                                       |       |
| December 31, 2006      |       | $                                                | 521        |                                     | $          | —               |       | $                                          | (406       | ) | $ | 115 |   |

 

DYNAMICMATERIALS CORPORATION

SCHEDULEII(c) - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

INVENTORYRESERVE
| ** **             | ** ** | **Balance at  beginning  of period** | ** ** | **Additions  charged to  income** | ** ** | **Inventory  write-offs** | ** ** | **Balance at  end of  period** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|
| Year ended - |       |                                           |       |                                   |       |                      |       |                                     |       |
|                   |       |                                           |       |                                   |       |                      |       |                                     |       |
| December 31,  2004     |       | $                                              | 57         |                                   | $          | 170                       |       | $                                        | (57        | ) | $ | 170 |   |
|                   |       |                                           |       |                                   |       |                      |       |                                     |       |
| December 31,  2005     |       | $                                              | 170        |                                   | $          | 158                       |       | $                                        | (163       | ) | $ | 165 |   |
|                   |       |                                           |       |                                   |       |                      |       |                                     |       |
| December 31, 2006      |       | $                                              | 165        |                                   | $          | 218                       |       | $                                        | (103       | ) | $ | 280 |   |

 

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